I wrote a post about the real (nay, ONLY) succession plan for any small business: sell it!
But, Steve asks about the alternative:
What if you don’t plan to leave? I mean, Maybe the plan is to run it till you can’t any longer, then the wife runs it till she is ready to sell, or pass to the kids(if they are even interested in that type business). My idea is to find Businesses that provide (mostly Passive income) where you don’t need to spend much time at the shop daily. Where your biggest job is probably gonna entail paperwork.
This is the ‘pipe dream’ of many a small business owner – and, was certainly my father’s ‘dream’ … bring the kids into the business and then pass it on to them. After all, look at the advantages:
– Continuing ‘passive’ income … your kids will eventually run the business and look after you
– You’ll be smart enough to keep a chunky % of the business for yourself to ‘guarantee’ a healthy share of the ongoing profits
– No issues around selling the business, finding the right buyer, or handing it over
– It’ll keep the kids off the streets (probably, my father’s greatest motivation)
And, that’s certainly the central theme of a book that I reviewed some time ago, called Get Rich, Stay Rich, Pass It On: where the authors suggest that the ONLY way to ensure that your wealth carries on through the generations is to have roughly 50% of it in “continually innovative enterprise/s” a.k.a. a business:
What we mean here by a continually innovative enterprise is one that either offers a product or service that breaks new ground or changes a traditional product or service so much that it becomes virtually new.
As I said in my review: “that is something that you do before you retire so that you can retire rich … you take risks, you innovate, then you sit back and reap the profits (or sell)”.
But, there’s a serious flaw in this logic: 99.9997% of small businesses are inextricably tied to the owner; large companies know this, that’s why when they buy a small business, it usually comes with an employment contract to tide them over until they can ‘wash out’ the Owner/Founder Effect:
This is the truism that the business IS the owner/founder and the owner founder IS the business!
The reality is that owner/founders and their businesses cannot be parted so easily and these large companies should NEVER buy small businesses because of the Owner/Founder Effect … inevitably, the owner falls afoul of the new management, leaves disappointed [AJC: hopefully, with bundles of cash in her pocket to help console her 😛 ], and the business goes downhill thereafter.
Eventually, the business becomes ‘absorbed’ in the overall enterprise and they conveniently ‘forget’ that they totally stuffed it up … and, more often than not the old owner eventually buys back his own business for 25 cents in the dollar.
Friends of mine started a computer company and sold/bought it three times … each time selling high, buying low and making a heap on each subsequent sale 😉
Do you think it’s any different, Steve, when you ‘sell’ your business to your wife and/or children?
Because that’s exactly what you are doing: selling it to the least qualified purchasers; you may be able to teach them some of what you know … perhaps even a lot … and, there’s a VERY slight chance that you will be able to teach them (assuming that they have the will and ability to take on what you teach) 98% of what you know …
… but, you can NEVER pass on that last 2%: the Owner/Founder Effect ‘magic’ that made your business one of the few small-to-medium business success stories.
That’s why I called the book’s concept of encourage people to start/buy, then keep, these innovative enterprises “the most dangerous idea in retirement planning that I have ever read”, because that last 2% – the bit that is IN you and ONLY in you – is the bit that you CANNOT pass on and will eventually send your family broke.
Of course, there’s at least (my best guess) a 0.0003% chance that your business COULD become the next Walmart and pass on to at least ONE more generation, but I wouldn’t be willing to bet my family’s financial future on that.
So, instead of trying to fit your business into your Life, here’s what to do:
1. Find Your Number, the one that allows you and your family to live their Life’s Purpose
2. Apply a FULL 100% of YOU to molding the business into something that can be sold for at least Your Number (LESS the value of any investments that the excess cashflow that you truly outstanding business has been able to fund)
3. Spend your free time TEACHING your kids how to fish for themselves
… that’s what I’m doing for you, and that’s what I suggest you do for them 🙂