Alicia Locheed Goodrow, a partner in Culhane Meadows’ Houston office, was recently interviewed for an article by City National Bank which discusses creating a succession plan to transition a business to multiple owners.
Here are some excerpts from Alicia’s interview:
In some situations, ownership of a business may need to transition from a single entrepreneur to multiple owners or stakeholders. This is especially common in family businesses, where those destined to inherit the company could be multiple siblings with varying degrees of interest in taking an active role in the business.
In these situations, a succession plan can become particularly complex.
As you work to outline the different roles and responsibilities of multiple owners, you should create a blueprint for how your company will run after you transition the business from one owner to many.
A business succession plan for multiple owners has distinct features that can help ensure the company continues to succeed years after the initial transition.
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In creating a plan, it’s important to think in terms of money invested and repaid, management, daily operations, decisions and compensation, said Alicia Goodrow, a partner in the business law firm Culhane Meadows.
“The key thing when you have multiple owners, whether it’s two or four or 15, is to really define the roles and to enter into a clear, concise, written agreement about who’s doing what,” she said.
Regardless of whether or not the new owners are siblings, people who met on the sidelines at a Little League game, or strangers brought together by someone else, it’s important to develop a written understanding of everyone’s role and responsibility, emphasized Goodrow.
HOW TO GET STARTED
Goodrow advises clients to use a spreadsheet that lists every decision the business faces, including the seemingly trivial.
Detail out who will handle which decisions. Once that’s decided, each owner should incorporate these responsibilities into their LLC or share management agreements.
“Before they go and engage with a seller, whether that seller is dad or that seller is a prospective exit party, they need to know what their story is and put their project together, and that can get complicated,” she said.
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WHAT NOT TO DO
Goodrow cautions against selling, say, to four people who simply believe it’s a great time to buy a business together.
“From a seller’s perspective, I think it’s much riskier to sell to a newly formed group of people,” said Goodrow.
Instead, she usually encourages business owners to sell to an established competitor or a private equity group – anyone who is bigger in their supply or purchasing chain.
THEN THERE ARE THE LEGACY EMPLOYEES
Weaker legacy employees can pose a challenge in family succession plans, said Goodrow.
When outsiders buy the company, they tend to make their own decisions about unproductive employees, but these relationships can be trickier when children take over from a parent, she noted.
Family businesses often have a long-time employee — let’s call him “Harvey” — who’s close to the family but may not be the best fit for the future, said Goodrow.
“When Harvey has been an employee for longer than the buyers have been alive, and he’s somewhat of a paternal figure, it’s really hard to get rid of Harvey,” she said.
While letting your “Harvey” go may be healthy for the business in the long run, be aware that it can be incredibly disruptive to the business in the short run.
The complete article can be found here.
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