Handing Down the Business
In a couple of years, Matt plans to retire and would like his son to take over the business. Matt's son would buy the tools and equipment he wanted and sell the rest. What's the best way to transfer it?
QUESTION: Matt in Colorado is 58 and self-employed. His son works with him. In a couple of years, Matt plans to retire and would like his son to take over the business. The business has a $45,000 yearly net profit and Matt’s son makes up to $55,000 a year. For the transfer, Matt’s son would buy the tools and equipment that he wanted and sell whatever he didn’t want. What’s the best way to transfer it?
ANSWER: If he wanted to give you $50,000 for the tools and he owned the business, he could probably do that in about a year because he’d have the extra income in addition to his salary. He would make $80,000 to $100,000 a year if he owned it by himself, between his income and the profit. If he gave you $50,000 out of the first year and had a slim year, that wouldn’t be a bad deal for him.
Clearly define his role in using your shop. If you say that he can use it until he needs to move, you might look up 10 years later and he’s still there. As far as you’re concerned, he’s five years overdue on having to move, but has far as he’s concerned, he’s just using the shop. You need to say that, in three years, he needs to plan to move. If it doesn’t work perfectly, you can talk about it, but that needs to be the time frame.
Start thinking that way, and that means he has a year to buy you out and two years to find a place to rent. If there’s a major problem in the economy or something, you can put it off for a year if you need to, but go with the three-year schedule and write that down.
You guys are both married, so it’s very important for the four of you to all be in agreement on this. When family works together, there has to be very clear communication. That way, his wife doesn’t feel like her father-in-law ripped them off or something. If she’s in on the decision and your wife is in on it, and you are all in agreement and they’ve gone over the agreement with you and everyone is all right with it, then put your stamp on it and move forward.
It sounds like a pretty easy thing. The other thing is handing off succession. It needs to be very clear and stated. Go ahead and start talking to your team about that as well. Tell them you’re on a two-year schedule and that your son is going to be learning certain things during that time and you are going to make sure he is a leader who can run this place.
That actually gives your employees a lot of confidence that everything is going to be all right. I am probably about 15 years away, not from retiring, but from not running this place as the CEO. I’ve already begun the succession process of building leaders and working with the new owners, who are my kids.
The leadership team here knows that and knows the details, so they are helping all of us achieve that 15-year goal. But that gives them the sense that we are heading the right way. They don’t feel like they have to leave because the old man is getting old and the place will close down when he dies. Instead there is a plan, and that gives them great peace.
It has been very good for attitude and moral around here that we’ve begun to talk and look generationally about how we’re running the place. You’re being very wise about how you are doing this.