Will your business survive

The following is based on one of The Covenant Group’s clients. All of the names and telling details have been changed.

David Kim wanted to begin phasing out of his business but he wasn’t sure if his business would survive and support him throughout his retirement.

David, a fifty-eight-year-old advisor, wanted to edge himself out of running the business over the next five years, after which he’d like to stay on part-time to consult on large cases. He saw himself taking 200K annually, half of what he was taking now. However, his thirty-year-old son Stan and one of his two daughters, Lisa, had joined him in the business, and while they were smart and ambitious, David wasn’t confident that they could take over. He wanted our help in developing their skills to run the business without him.

Stan worked with David in sales, while Lisa did service work. Another woman, Barb, who’d been with David for over fifteen years, shared the service role with Lisa. About Barb, David said, “She knows my business inside and out; I sometimes don’t know what I’d do without her.”

“David,” I said, “you’ve told me what you want, but what about everyone else? Are Stan and Lisa committed to staying and growing the business?”

“Absolutely. They’re devoted to the business.”

“And Barb?” 

“She wouldn’t want to go anywhere else, but frankly, we’ve been having a problem with her lately.”
David explained that Barb had become upset after finding out Lisa made 80K, while she only made 45K.

I asked David if Barb and Lisa were performing similar roles. When he answered yes, a red flag went up in my mind.

“Why are you paying them differently?”

“Lisa’s my daughter. I’m paying Stan 80K and I want to treat all of my kids equally.”

“Stan’s performing a considerably more complex role than Lisa,” I said. “How does he feel about being paid the same as someone doing a less valuable role?”

David suddenly got defensive. “Stan knows he’s got a head start on a lot of young advisors; he’s not concerning himself with how he compares to Lisa.”

“David,” I asked, “do you know what Stan’s expectations are? How much money does he plan on making in the business?”

“Sure, he’d like to follow my example. In a few years, he’d like to make 200K, and then eventually work his way up to the 400 to 500K range.”

“And your daughter Lisa?”

“She definitely sees herself as important to the business as Stan. I know she wants to make what he does.” 

“And she plans on evolving into a producer?” I asked.

“Not at all. She wants to run the office.”

By now I was seriously concerned about what David had done to his business. “David, earlier you said you wanted to treat each of your children equally. What about your other daughter?”

“She’s at school in the States. I’ve been subsidizing her education and apartment in California. She knows she’s being treated fairly.”

“David, I admire your value of fairness,” I said, “but let me ask you something. As you ease out of the business, you will have to transfer the running of it to someone — who?”

“Stan, of course.”

“And so your current roles will be reversed — Stan will be the CEO and you’ll work for him.”

“Yes, I’ve already thought that through. He’s the future of the business, not me.”

“David, let me be frank. A few years from now, when your son Stan is running the business… when he’s out there networking, calling on prospects, building your clientele, putting together expert solutions for them and generating hundreds of thousands of dollars in commissions or fees…. When he sees that he’s the one growing the business, he won’t be happy if he and Lisa are taking out the same income. He’ll know he can replace her for a fraction of what she’s making and he’ll realize that keeping her at such a high salary is making the business less competitive — instead of overpaying her he could use the money to hire other support staff, take on other producers, install a new computer system, run a marketing campaign. But if he doesn’t pay Lisa equally, she won’t be happy… You’ve created a catch-22 for your business.”

David acknowledged the problem he’d created.

“David, many financial services businesses are family operations, and the unfortunate tendency is to confound family issues with business issues. You have two problems. You want to treat your three children fairly — that’s an estate planning issue. You want to succeed your business to Stan, that’s a business planning issue. You need to keep these issues separate. And your challenge is to get everyone else to support this separation.

“You can meet that challenge in one of three ways — by appealing to interests, rights, or power. The best method is to appeal to everyone’s interests, but that’s not the way you’re headed. A few years from now, everyone’s interests will be opposed. Lisa will want to be paid the same as Stan. Stan will want to pay Lisa what her role’s worth and reinvest the difference in the business. Barb won’t be happy making less than Lisa for performing the same role. You’ll probably see Stan’s side, but you’ll be torn between your two children. And how will Stan solve the problem? Will he exercise his power as CEO and do what’s right for the business — but at what cost? Will it split the family up? Will people resort to lawsuits? Will Barb or any other key employees leave because of inequities? As you move from interests to rights to power, the costs go up — financially and emotionally.

“To avoid this scenario, you have to work today to align everyone’s interests. And there are three types of interests to keep in mind — those dealing with results, process and emotions.

“Your first step is to make sure that everyone agrees on the results — that in the end everyone will be treated fairly.

“Then everyone needs to agree on the process — that the results will be achieved through a combination of an estate plan and a business plan.

“And lastly, though probably most importantly, all emotional issues need to be dealt with. For instance, what is Lisa’s emotional connection to being paid the same as Stan? Will she feel less valuable when she’s paid less? How do you resolve this?”

David spent the next few months developing an estate plan and business plan that made everyone happy. He decided to split his personal assets, real estate and investment holdings, between his two daughters, and leave the business to Stan. Though the current value of the business was less than a share of the personal assets, Stan was happy to have control of the business and was confident he’d be able to grow it substantially over the years. Lisa was happy with the estate plan and eventually agreed that it made sense to pay her according to market realities. However, she still felt she wanted a stake in the business. To satisfy that need, everyone agreed that she’d give up a percentage of her estate for a minority shareholding in the business.

David’s sound estate and succession plan relieved the tensions that were eating away at the business and cleared the way to work on developing Stan’s skills to build a thriving business. Furthermore, Barb, a key asset to the business, was relieved to see the business following sound practices and was again excited to be part of the organization.

Lessons Learned

David learned that he was jeopardizing his succession plan by confusing business-planning issues with estate planning issues. Like many financial advisors who have sons and daughters in their business, David strayed from sound business practices in an attempt to deal with personal family matters. David learned that paying his daughter Lisa and his son Stan equally was a recipe for disaster. A sound succession plan must adhere to business realities — paying Lisa, who did service work, the same as Stan, a producer who would take over control of the organization, would eventually render the business less competitive. Unless Stan, the future CEO, had the freedom to optimize his resources and invest in the business where he saw fit, the business would suffer and so would David’s plans of phasing himself out and earning 200K annually from a thriving business. David was finally able to create a sound succession plan once he separated the estate planning challenge from the business. He was able to put a sound succession plan in place because he followed an interest-based approach, one that aligned the interests of all the parties — himself and his three children. By dealing with the three areas of interest — results, process and emotions — David ensured that everyone bought into the solution and that the business would not be weighed down by emotional baggage.

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The Covenant Group is referred to by many as the place entrepreneurs go to become Business Builders. They are considered to be thought leaders and have authored the best-selling books, The 8 Best Practices of High-Performing Salespeople, The Entrepreneurial Journey, and The Business Builder.