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Will
Your Business Survive You?
by Norm Trainor
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The following is based on one of The Covenant Group's clients, David Kim.
All of the names and telling details have been changed to preserve client privacy.
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 he plans 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 businessÖ 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 feesÖ. 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 happyÖ 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 share holding 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.
Norm Trainor
is the author of The 8 Best Practices of High-Performing Salespeople,
a speaker and principal of The Covenant Group, a company that specializes in helping
advisors build their practices. The Covenant group has worked with many of the world's
largest financial institutions, including such firms as Swiss RE, CGNU in Hungary,
Guardian, BMO and Clarica, helping their management and advisors create and sustain
high performance by adopting a systems approach to practice development. The Covenant
Group's proprietary practice development system, The 8 Best Practices of High-Performing
Advisors Program, has been adopted by organizations around the world and
is a leader in the industry. For further information, visit The Covenant Group's
Web site at www.covenantgroup.com or email info@covenantgroup.com or call The Covenant Group
at 416-304-1766.
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