More business owners are choosing a different kind of exit strategy that involves stepping back from day-to-day operations without retiring or severing ties with the company they built. On the surface, a transition like this can seem straightforward, but rarely is. In my recent work with a family-owned business, what appeared to be a simple partial exit quickly revealed layers of complexity the owner hadn’t anticipated.

The Business:
This decades-old, Colorado-based company had created a name for itself in its industry with a loyal following.

The Situation:
When the family patriarch decided to take a step back from the company, he transferred equal percentages of ownership stock to four adult children, encouraging them to become more involved in the business, while he retained the largest percentage of stock.

The Problem:
Transferring ownership within an immediate family might seem to be a simple process, however no specific plan had been developed and agreed upon prior to the transfer of stock in terms of whether and how the siblings would be involved in the business.

Of the four children, one had been heavily involved in the business for many years and was enthusiastic about taking on more responsibility. Another came to work in the business after receiving stock but left after two years. The remaining two chose not to work in the business, took their stock and left.

As things evolved, the father came to the business every day but gave up leadership roles. The working sibling took those on including major leadership, management, and decision-making tasks, yet his percentage of ownership didn’t reflect the level of responsibility and liability he had accepted.

The Solution:
They needed a continuation plan. I worked with the father, the majority shareholder, to help him understand the inconsistencies between the leadership responsibilities assumed by the managing sibling and his percentage of ownership. The result was a proposal that yielded the following decisive actions:

• The company incurred sufficient debt for the managing sibling to buy out all the stock from one sibling and a small percentage of stock from the others.
• With these stock purchases he now owned more than 50% of the company stock such that his ownership share was consistent with his responsibilities.
• All decision-making was shifted to the working sibling, giving him financial control of the business, which was more consistent with his level of responsibility, and subsequently providing much-needed peace of mind.

Other Challenges We Continue to Address:
Now that the business leadership structure and stock ownership are more in line with the business’ long-term operational needs, I continue working one-on-one with the new leader of the company. Together, we have identified and are addressing other areas that need attention:

• Inventory: Overbuying has occurred in past years, driven by good intentions to serve customers well. However, projections were off and now inventory needs to be reduced. Various efforts, such as periodic sales, are reducing inventory and the costs of maintaining overstock. Processes are now in place to more closely monitor inventory and order in sync with current needs.
• Key Performance Indicators (KPIs): We’ve identified the top KPI priorities for the company and what attention is needed to improve issues that were uncovered. A top priority is keeping a handle on gross profit percentage, which is hugely important to their type of business.
• Management: The new leader understands the need for a management team to which he can hand off responsibilities. We are working to create a team that can free him to work more ON the business rather than primarily IN the business.
• Documentation: We have begun documentation of job descriptions, roles and responsibilities, and the company’s processes and procedures. This project often brings to light ways to improve organization, efficiency, effectiveness, and costs as well as for cross training.

Takeaways for Business Owners:
Initially, our working relationship centered around restructuring after the patriarch’s exit and the ineffective stock distribution. Those efforts have morphed into the development of a continuous improvement strategy, which often happens organically in transitions like this. Two key takeaways emerged from this family’s business story:

• Smooth exits are the result of pre-planning, avoiding the need to back-track and repair unanticipated missteps. The adage “you don’t know what you don’t know” rings true here. Having worked with an exit strategist to guide them to and through the patriarch’s exit would have lessened the angst among family members and disruption to the business.
• Transition to family members not only requires pre-planning, but post-transition activities and planning to keep the business humming and ready for the next transition – whether it be to the next generation of family members or an eventual sale. Our continued work focuses on strengthening company performance and building business value today for a higher valuation in the future.

Working one-on-one with me means business owners can expect more certainty in transition. Regular process reviews, tracking, and accountability keep the owner informed and in control of the health of their business each day, while keeping an eye on a future transition.

What could a future transition look like for your company? If you haven’t thought about that yet, consider this family’s experience and how pre-planning could have prevented missteps. I’d welcome the opportunity to help you review and prepare your business for a smooth transfer – with the greatest benefit to you, your family, and your future. Contact me to schedule a complimentary consultation to discuss your needs.

Note: Specifics of this business have been excluded to respect the family’s privacy.

Bob Zarlengo is a certified exit strategist and CPA. More than four decades of experience in public accounting, expertise in financial reporting, income and estate planning, and tax compliance make him a valued and trusted advisor to his clients.

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