Show notes from Podcast Episode 66.
Hey Nick it John from Vancouver. What are your thoughts on taking over a family business?
I think if you analyze it right and take the right steps its an amazing opportunity to own a business that is years ahead of one you might otherwise start. You can also likely get it at a fair price, have an idea of the inner workings, trust the parties involved and make a deal with low risk and a lot of upside.
It can also be hell. Personal relationships can deteriorate if expectations aren’t aligned with reality or you don’t communicate properly with the necessary parties before jumping in.
The opportunity to take over is a semi-successful family small business that has a lot of room for improvement is a very common situation. There is a LOT to unpack here. Lets dive in.
First you must keep in mind that there is a massive human element to this. In stressful life-changing situations people are not always logical beings – they are emotional. Family and business intermingling creates a very emotional situation. Your family member has likely built this business from scratch and it has been their entire life for a long time. It is their identity and their legacy. Their customers and employees are like family. Their retirement is likely tied up in the corporate bank account. You are taking a chance and changing your entire life and career path to take this over. Two very emotional parties right?
Remember something very important. Most forms of conflict and resentment stem from expectations that are not met. Somebody has expectations of someone else that likely aren’t properly communicated (most often they are assumed). People may have totally different ideas of how something should work. People may have different goals. People may have not clearly outlined day to day responsibilities.
The main theme of this post is that it’s all about effective communication and managing expectations. You have to figure out what everyone in your family EXPECTS to happen. Not only your family member that owns the business but also your siblings.
If you properly communicate and lay out everyones expectations on paper, manage those expectations and make decisions based on this information you will be much more likely to succeed. It’s a lot more likely to shake out without anger or resentment or a family feud when money is involved. You’d be amazed at how many families end up resenting each other and going to court over things just like this. Don’t let it happen to you.
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You first need to do some introspection and figure out exactly what you want out of this deal by asking yourself a series of questions.
Does it align with your career and professional goals? Does it have growth potential? What would need to happen to make it worth it to you?
What is your relationship like with your family who owns the business? What are your personality types? Would you get along in co-management roles?
Do you have the skills and ability to take over? Will you need your parent on board for a while to keep it above water?
Many times the business is a job for the owner. It isn’t set up to run without them if they quit? What are your thoughts on this matter from the outside looking in?
What is the future of the business if you don’t take over? Is it large enough to run itself? Would your family member be able to sell it on the open market?
What improvements would you make the the business? Digital marketing and web presence are likely some improvements you can make but keep something in mind. There is a good chance the business doesn’t have a customer problem. They probably bring in plenty of revenue and have their hands full keeping up as it is.
Building a nice website, running online ads and getting on the first page of Google sounds great and all but thats not the hard part of running a service business.
Every business has either a customer problem (not enough sales) or an employee problem (not able to deliver solid service to the customers you have). Which problem does this business have? Which one of these factors is limiting the growth?
The employees and the internal systems are the hard part. What would you do to improve the business in this regard? How would you organize the company structure? How would you recruit and train employees? How would the pricing the business charges the customers need to change to make this happen? The Sweaty Startup is dedicated to helping solve these problems but they are complicated and they take a certain level of management know-how to do.
The point I’m trying to make here is that you aren’t going to just put together a website and some digital presence and all of the sudden add a ton of value to the business. The real value is being able to deliver and build an organization with systems and processes to solve the employee problems and be able to deliver these services. So make a plan for that and get serious about this part of it because its the key.
Before you do anything else put pen to paper and organize your own wants, desires, goals and plans. Going into this without a plan is not a good idea. Saying to yourself “oh I’ll just get started working and we’ll figure out the details later” is not a good idea. Figure out what you want before moving on to the next step.
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Think of this as an investor presentation. You are going to walk into a meeting with the person who owns this family business and tell them exactly what you’d like to happen for it to be worth it to you to get involved.
Some considerations to make while making your plan and building your presentation:
It’s not all about the money but it’s an important part of the equation that is often ignored. Don’t name a price off the bat but realize that it needs to be agreed upon before you start working in the business. Think of it as an option. If I start working now I have the option to buy the business for this price 6 months from now or a year from now. The last thing you want is to start adding a ton of value and make the business way more valuable and then end up having to pay a higher price or disagreeing on the price when it comes time to ink the transaction.
Consider doing a trial period. Have all the hard conversations with the necessary parties and then come on board either part time or full time with a trial period and the option to leave. Begin to work alongside your family member. Get a feel for the business. Dive in and start analyzing the books. Get feedback from customers and employees. Get to know the inner workings of it all.
When you uncover information that changes the initial discussion or the agreed upon price or the future of the company have scheduled times to discuss them.
COMMUNICATION IS THE KEY.
A quick note – if the business is very small or you aren’t taking it over this may not make sense. There is a difference between going back to work for the family business and going back to take it over. Sometimes you should just jump in. Maybe you’re just out of college or not even going to college. Maybe you don’t have a lot to bring to the table. Maybe you’re unable to make a plan because there is so much unknown. Look at it as any other opportunity in this case.
But if you’re leaving your job and relocating your family and beginning to take risks and invest capital its worth making a plan right off the bat. This is what I’d do:
Go meet with your parents first. Tell them your plan. Tell them you’d like to take over the business on these terms starting with a 6 month trial period. Tell them exactly what you expect. Tell them or ask them exactly what they can or do expect from you. Discuss your job description and responsibilities. Tell them your goals. Tell them or ask them exactly how the hierarchy will work and what you want input on and what is non-negotiable.
Play the what-if game. What if the business fails? What if we miss our revenue targets? What if Dad and I disagree on a big decision? Who gets the final say? What if the family member wants to stay involved and still needs income? What will the salary be? When will they retire? Are they living on the business? What if one of us gets sick? What if the other siblings also want to come get involved? What if somebody goes bankrupt? What if somebody stops working and gets lazy? What if the business needs to borrow money? What if I do a trial period and decide I don’t want to move forward with the purchase? What if the terms would need to change if something is uncovered during the trial period?
Lay it all out there. Have the hard conversations. Discuss all the difficult situations BEFORE they happen so you are in agreement and can get on the same page with each other’s expectations.
Then it’s time to talk about money. How much is the business worth and what will be the payment terms? Will your family member finance it or will you need to get outside financing? Will it be a gift? Are the terms favorable because you are a family member?
I’m not going to go into the rabbit hole of trying to tell you how to value a business. It depends on so many factors. Many times you can come to a fair figure by having a discussion. Sometimes you should get some consulting and pay for it.
If you are going to take over the business and you want to control it its often best to purchase it outright. Feel free to get creative with your financing and terms. Maybe put an option in place to purchase the business one year from now for an agreed upon price and on agreed upon terms and then do a one year trial period to get in and feel it all out. If you like what you see maybe you execute the option and go forward or maybe you walk away.
Talk to your siblings. Don’t make the same mistake that so many others make. It happens all the time – somebody is given a business or they purchase it at a heavy discount with favorable terms without even cluing the siblings into what is going on. They find out later and they are rightfully upset because it wasn’t fair. Getting a major financial gift from a parent, especially an aging parent without an equal gift going to your other living siblings is a great way to make everyone upset and even bring upon legal action.
When you discuss and organize how everything will look with your family member who will be selling or giving you the business the next step is to have a conversation with any living siblings and their spouses. Tell them what you’re doing. Tell them how much you’ll pay. Tell them how you came to the number. Tell them what type of financing you’ll use.
If the thought of sitting down with your siblings and explaining this makes you uncomfortable its not a good sign. You’re likely getting favorable terms that aren’t fair to the other siblings. Ignoring this and proceeding onward is a horrible idea.
Get them in the loop with the entire family involved so people can voice approval or disapproval of any part of the deal.
If there is no record of a conversation it didn’t happen. I always advise spending the money on an attorney to help you put together a purchase and operating agreement. It’s worth the heartache and stress that could be caused down the road if people flip sides or everything wasn’t exactly clear. While good communication helps it means nothing for the future if you don’t have any record of it.
Any two parties, family or not, can totally disagree on how and when certain things were discussed if there is no record of it. People forget things. People reconsider things when more money is involved. People change their mind and go back on their word if its convenient to do so.
In the very least draft out the notes discussed with all family members, siblings included, and distribute by email. Ask them to read the email and send a confirmation email back to you. Thats a good way to have record of what was discussed as a worst case fall back. They’ll voice miscommunications right then and you can iron out any kinks before things get big and emotions get involved. An email is not something that can hold up in court but it’s a lot better than nothing.
Don’t hesitate to get some outside consulting when going through a process like this.Maybe an appraisal for the business valuation. Maybe a consultant who will charge by the hour to come in and help both parties sort through the details of how it will all work.
In closing… you might think after saying all of this I’d say it’s a bad idea to take over a family business. That couldn’t be further from the truth. I think it could be an excellent opportunity and you should definitely consider doing it.
Just make sure to communicate effectively and consider these factors and you’ll set yourself up to have a great experience and a successful business for many years to come!