CASE STUDY 2: A Debt-Free Business Transition: Achieving Family Harmony and Financial Security
The Issue: An owner and his spouse want their son to take over their business and enough money to live a comfortable post-business life. The son doesn’t have the funds to pay his parents what they want for ownership, and he refuses to use debt to pay for it.
The Resolution: The parents used The Transition Roadmap Developer™ process—especially The Objectives MatrixTM—to reach a resolution that met all parties’ most important goals.
Over the course of their 40-year marriage, Brad and Suzanne raised two children and built their plumbing supply company (B&S Plumbing). B&S started out serving residential and commercial contractors within a 100-mile radius of Omaha. After 15 years, they expanded to sell parts to the retail market as well.
The couple’s two children—Claire and Clayton—had worked at B&S during school vacations. When I met the couple, Clayton had been working full-time in the business for about six years, and Claire had just started her freshman year at the University of Nebraska.
As Brad and Suzanne explained to me during one of our first conversations, the business was going gangbusters.
“The company is doing really well,” Brad started. “Our reputation is great, and we’ve got a great group of people who must like what they’re doing because most have been with us for years.”
Suzanne chimed in, “B&S is successful beyond our wildest dreams, but let’s not forget that Clayton has something to do with that.”
Suzanne went on to explain that three years prior to our conversation, Clayton had convinced them to dive into the world of online commerce.
“I think ‘dragged his father into the online world’ would be an accurate statement,” explained Suzanne. “Once Clayton got the website up and running and the order fulfillment process nailed down, sales climbed so quickly. What was it, Brad: only a year before sales doubled?”
Brad shook his head, “I don’t know. Maybe. But none of that would have happened if we hadn’t spent years breaking our backs to make the place a success. Without all our work, Clayton would have been building his internet castle on a pile of sand.”
This was a topic I wanted to return to, but thought I’d break some of the tension by asking about the couple’s daughter.
“She’s doing great!” Suzanne gushed. She’ll be home next month after she finishes her first year as a Cornhusker.” She quickly added, “I’m proud of both our kids.”
“Sounds like things are going really well for your family and your business. How can I help?” I asked.
The couple exchanged looks before Brad motioned to Suzanne to begin.
“It’s time,” she started. “It’s time for Brad and me—especially Brad—to step back.”
Brad quickly jumped in, “’Step back,’ is Suzanne’s way of saying, ‘It’s time to turn everything over to Clayton.’”
“That’s not true!” Suzanne responded. “What is true is that we’ve been at this for years, and Clayton has proven that he can run many aspects of the business. He wants to continue to learn so one day he can run it all! It’s the things we don’t know that keep us going round and round about all this!”
“Tell me more about ‘the things’ you don’t know,” I asked.
The answers came back in rapid fire.
“We don’t know what the business is worth!”
“We don’t know if whatever the business is worth is enough to keep us financially afloat during retirement.”
“We don’t know if Claire wants to go into the business. She’s never said so, but she’s just 19!”
“We don’t know—or at least I don’t know—,” concluded Suzanne, “if this tension between us and between Brad and Clayton can go on much longer without causing real damage to our family.”
Believe it or not, Brad and Suzanne were like most of the business owners I meet. They own successful companies and love their families. They want a fair return on a lifetime of investment time, money, and effort. They want their companies to continue to succeed after they leave them, and they want peace at their dinner tables. They just don’t know how to get everything they want.
“Let’s start,” I suggested, “with what you do want, rather than what you don’t want. In other words, what do you want the transition of your business to accomplish?”
This time, Suzanne let Brad go first. “I want to be compensated fairly for building this company.”
“That’s it?” I asked.
“Pretty much,” Brad said. “Well, that and a second home.”
“Suzanne, what do you want?” I asked.
“I want Brad to be compensated fairly for what he’s done and Clayton to be compensated fairly for what he’s done. We wouldn’t be making the money we are without Clayton. When the time comes, I want Claire to have the same opportunities we’ve given our son,” Suzanne explained. “And a second home? We’ve talked about it, but that’s not happening anytime soon.”
“I’ve started looking,” interjected Brad.
Suzanne sat back in her chair. “Well, I guess we’ve all learned a lot in these 20 minutes! What now?”
I suggested and summarized the Transition Roadmap Developer™ process and focused on two important points:
- The most productive place to start would be with the couple’s goals. What did each of them want the transition to accomplish for themselves as individuals and as a couple, for their family, for their company, employees, and even customers.
- Unless the transition of the company kept their most important relationships healthy, we wouldn’t consider the transition to be successful.
“How does that sound?” I asked. Both nodded, so I continued, “Good. I’ll send each of you a tool we call The Objectives Matrix™. If you’ll each fill one out and get them back to me, we’ll pick up there when we meet again.”
About thirty days later, the three of us got together. I’d had time to digest the information they’d provided and jumped right in.
“Suzanne, one of your goals is to have enough money to live the life you want. Is that right?”
“It is,” she said. “I do the books, and I’m just not seeing it. Clayton isn’t going to be able to come up with the money we need!”
“Suzanne, we’re doing fine. And if Clayton knew how to use debt, this wouldn’t even be an issue!” Brad responded.
“We will definitely talk more about the financial elements of the transition,” I reassured them, “but tell me more about Clayton and debt.”
“He’s allergic to it!” Brad explained. “He doesn’t understand that debt is part of building a business!”
“That’s not fair,” Suzanne said. “He’s got a young family, and you think he should take on more debt than you ever would have at his age!”
“Let me understand,” I asked. “Clayton wants to own the company, and you want him to own the company, correct?”
Suzanne and Brad nodded.
“And you agree that Clayton doesn’t have enough money to pay you what you think the business may be worth, much less what you want for it, so he’ll have to borrow funds to pay for ownership? Is that right?” I asked.
“More or less,” said Suzanne. “I want us to live the life we’ve earned after years of hard work. I just don’t want our son to go into debt to make that happen!”
“Got it,” I said. “Let’s start to replace some of the things we don’t know with hard data.”
With Brad and Suzanne’s approval, I did what our team often does when creating a Transition Roadmap: contact the professional advisors with whom our clients already have working relationships. Typically, these advisors have earned our clients’ trust and can contribute their expertise and insight to the planning process.
“If you’re looking for a projection of the value of our investment portfolio—not including the business—our financial planner’s got that,” Brad said.
“Great,” I answered. “I’d like to plug that information into a worksheet we use that models the business performance based on your assumptions about future growth, salary, and distributions up to the point at which you’d transfer any ownership to Clayton. We can then play with the timing, growth, and salary variables to come up with a solution that could work for all of you.”
Once again, Brad and Suzanne were open to moving forward, so I asked if I could meet with Clayton. Again, they agreed.
While the couple’s financial advisor was compiling the information we needed, I talked with Clayton. Like his father, Clayton had strong opinions about what he’d contributed to the business and how he should be compensated for his effort.
“I give Mom and Dad credit for building B&S. I do,” Clayton assured me. “I just wish they—well, Dad—would give me credit for what I’ve done. I brought the company into the 21st century, and the thanks I get is ‘Borrow to pay me for what I built!’ Well, that’s not gonna happen. I won’t do it.”
Suzanne’s words about destroying the family came back to me as I listened to Clayton’s frustration. I told him that his parents were clarifying their vision for the company and the family and were collecting financial data they needed to make some hard decisions.
At the next meeting with Brad and Suzanne, their financial advisor walked them through her financial projections—excluding the value of their business—and showed them that they could, in fact, afford a second home. That was one concern managed.
Together, we looked at how we might structure Clayton’s buy-in. We plugged in various increases in his salary, and dates at which he might purchase ownership. We added to his salary the dividends he’d receive for his share of ownership.
We didn’t arrive at an answer during that first meeting. It took several iterations to come up with a solution that all three could agree on. Note that I didn’t say “A solution that met everyone’s expectations and goals.” No transition meets all the goals of everyone involved, but when done right, a transition not only keeps the parties’ important relationships intact, but it also meets the most important goals of the people involved.
Brad and Suzanne finalized their Transition Roadmap after working through the numbers, including the debt issue. With everyone aligned on a direction forward, the family was off and running. The fun and satisfaction of working together every day replaced the tension and uncertainty that could easily have torn their family apart.