Welcome to another edition of the inside BS show. I am Dave Lorenzo, and we're here with Harry Sendrowski. Hello, Harry.

How are you today? I'm doing great, Dave. How are you doing? I am doing fantastic. So Harry, we are talking today about the family founders dilemma, and this is something, as I mentioned to you before we came on today, this is something that just came up recently and I was at an event and, uh, I was introduced to someone and they said to me, you know, I got this business and I got two kids.

They both worked in the business since they were younger. The youngest one is ready to graduate from college. The oldest one's already graduated.

They say they want to work in the business and I will pass the business onto them, but I just, I'm not sure if it's right. One of them is working in the business now and he's doing fine. I don't know that he's a good fit to lead the business.

The other one's going to graduate next year. She's probably a better fit to lead the business. I don't want to create any problems.

It might just be better to sell the business and split up the cash. So Harry, I'm betting that this is something that you hear frequently that family businesses, the founders think to themselves, do I keep the business, pass it to the kids, and I'm not a hundred percent sure that the kids are going to be able to run the business or do I sell it, get maximum value because the business is still growing, it's still doing well, and then just give the kids the cash and let the kids do whatever they want. This is a, I would, if I'm, if I was a family business owner, this would be a big dilemma, this would keep me up at night.

Is this something that comes up all the time? Yes. David comes up in a lot of different flavors, but you know, the fact of the matter is that depending on the size of the business, obviously you have factors like other executives taking consideration, you know, how large is your work worth, what positions they're in. I mean, ideally what you want them to do is just like you would in a larger organization is have them work in each section of the business for a time period.

And so, so they actually understand the business, just not one aspect of it. You know, that would be ideal, but I think it all comes down, a lot of it comes down to, you know, communication with the, you know, the parents and, and I won't call them children or adults about what they want to do. And the case that you just outlined, you know, we'd always suggest is even the one that's just graduating is have that person go work for someone else, at least for a couple of years and come back.

We've talked about this before. The one that's already in, I think you have to take a different tack and say, look, I need you to work in these other parts of the business. And then the other question is, are those siblings compatible at all? You know, down the road and can you, would they, could you actually at one day have both of them, you know, running the business side by side or is there jealousy and you know, that, and that changes over time, but I think the big thing here is communication.

I don't think just selling the business accomplishes a lot from a, you know, one from a legacy standpoint, if you do have a thriving business depending on the age of the patriarch and matriarch and you're not going to be around, it's, you know, you don't have a strong management team, you're probably not going to get the money you think you possibly could get. So I would, first of all, concentrate on if, if that's the case where you're looking at, I would concentrate on bringing in some really good executive hires or senior management hires. And as you, before you actually hire those people, what I would do is I would sit down in your case, you mentioned there are two adults, two children that are now adults, I would sit down before you actually hire those people, explain to them what you're trying to do, that you need to bring in some people to help run the business.

And these are the people that you feel are critical. So you're going to go through that whole process and ask for their input and say, eventually where would you see yourself coming into the business? You know, we need to train you, we need to do everything else, but what part of the business would you really like to run, you know, down the road? So it all comes down to communication. And if you don't get obviously good, good results out of that, then that'll tell you, you know, a lot, but I think you really need to get their input.

I think if you just turn around and sold the business, I think it could potentially harm the relationship with both, especially though, when it's in the business, because they're going to, he or she's going to say, dad, I put in seven years with you, what am I, you know, now I got to shift gears. I'm not, I'm not prepared to do that. So I think you really need to step back a little bit and approach it a little bit differently.

And I think the idea of bringing on other people to bolster the business and expand it, uh, serves everyone well, serves you well, serves them well and provides other opportunities. And you'd probably want to try to find someone there who could actually mentor them, you know, over time, because it's, it's like a lot of times, uh, we've all run into this is that you say something to your children and they think you're an idiot, but their best friends, parents say that, and they think they're the smartest person in the world. Uh, so, so I think you need to find someone there that could help mentor them and that at the same time mentoring, but not undercutting you because sometimes we've seen that too with executives.

So it's gotta be a, an approach that I think is, it's, it's a family approach, but it's also has a big weaving of a, of the business to maximize value. And there's a huge difference between a business doing $5 million in annual revenue and a business doing $30 million in annual revenue. You can invest in a real, you have to invest in a good management team at $30 million.

And if you've done, and we talked about this ad nauseum here on the inside BS show, if you've done succession planning appropriately, you've done your continuity planning appropriately. You have people in place that can run the business short-term and potentially long-term as those kids are growing up. And as those kids are going through college and if they're getting graduate degrees, or if you're sending them out to work somewhere else, you've got a competent management team running the business at $30 million.

So the competent management team could, somebody on that team could take over the business might even be ripe for a management buyout. So maybe the kids participate in the management buyout and the kids have a role in that or something along those lines. So the size of the business makes a big difference.

We have, there's somebody that I worked with years ago who owned a professional cleaning company and the company was doing about $2 million a year in annual revenue. And it, you know, professional cleaning is a labor intensive business. There's also inventory with chemicals and they had vehicles.

So there's a lot of moving parts. It's a complex business. The patriarch literally would spend four hours a day on vacation on the phone with people who are at various locations or picking up stuff and, you know, take getting a delivery.

When his son graduated with his MBA, the son came into the business and lightened the workload on the father. They also brought in a killer salesperson who was able to double the size of the business for them. And because the son was involved while the business was doubling, the son kind of grew into the role.

And eventually the son became the chief operating officer. The father was able to take extended time off and it was kind of a natural progression in a smaller business. Now they didn't have, they had a, they had an operate, they had a chief operating officer and they had a sales, they had three salespeople and one person was like the sales manager.

And then they had various crews and supervisors of crews, but they didn't have a lot of heavy duty, sophisticated management. It was a, it was a smaller business and it was kind of a natural transition. It's easy.

I think when it's one person and the person works in the business for five, six, seven, 10 years before the founder has to step away. And I think that's, that's kind of the, the best process to see or the best practice to see if the kids are, if the kids are a good fit, you think? Yeah, not only that, I mean, your, your, your example is great because you're bringing in today's technology and looking at the business and, you know, fortunately for this person, you know, his son was willing to do that and they had the wherewithal to bring something, you know, really good for the business and change. So, uh, but you know, but being, again, you're part of your conversation and you've got a vacation, it's four hours a day.

The problem with businesses of that size, you're working six, seven days a week. Yeah, for sure. That's, that's the way it is.

So what are benchmarks and what are, uh, red flags with successors, whether they be children or people who are working in the business, what are, what are some benchmarks? What should people look for to see if, you know, what responsibility should they be giving these up and coming leaders to see if they're capable of getting the job done? Well, I think they should be taking the same, you know, job responsibilities as a, as the company has dictated for others, um, or creating something and maybe, you know, hiring a HR consultant or someone to really help on that process. Again, you're going to be bringing in outside advisors. So it's just not the patriarch and matriarch saying it, you may be making a position for them in the company that they could actually expand.

Um, so I think that's, what's important. You, you do need to bring in some outside competent help. This is not your buddy, uh, that they see at the barbecue and everything else.

You need to bring in someone who's going to be, who's going to know how to handle it professionally. So they're not insulted and explain to them what the long-term processes and plan, because then you can, they can also then plant seeds and say, look, your parents want this. They really want this company to grow and they want you to be truly a part of that.

And you know, monetarily pride wise, legacy wise, those people can deliver, you know, a lot of questions, you know, with respect to that, you know, it reminds me of, this was kind of funny. This is years ago now, my two daughters were in high school and I sent them to, um, country day and they came home one day and they were just kind of really, you know, teachers are saying this and saying that, you know, about how much money it costs to go there and you know, blah, blah, blah, blah, blah. And I sat there at dinner and I said, did you ever hear that from me? The answer was no, you know? So the teachers were sending a message, you know, to the students, you know, that I never said, and I never asked them to send it, but it was just kind of an interesting, you know, a fallout at dinner.

I said, you've never heard me say that. Yeah. I mean, they just kind of shut up, but you can send positive messages through other people that they respect that helps the family.

So you have to think about it in that context, you know, where, where can that be helpful? Okay. So let's talk about governance structures and what, you know, you spend a lot of time looking at businesses and you're in and out of a lot of different businesses in a family business. It can often be, and I say this all the time, family businesses are started to pay the bills and then something happens and the business takes off.

And the next thing you know, it's a $10 million business or a $20 million business. So what governance structures should be in place in order to make sure that the business is going to be ready for someone else to take over? What, you know, obviously financial governance, we spend a lot of time talking about that. What other aspects of the business should be looked at to make sure the business is ready for a transition? So just two overarching items.

So if people are involved in the business or being reliant on the business at the second generation, I think the important part here is, first of all, hopefully you can bring in somebody either through an advisory board or actually on your board of directors, your banker, or somebody else that you can trust that has a lot of financial savvy and has seen a lot of different situations. So what you want to do is let's assume you had an operating company, everyone's getting paid, and then you got to make the decision about are you going to have distributions or not? And then the question is, what's the level of those distributions? Because you still need working capital in the company. And what you're doing is you're teaching the second generation that even though there's cash there, you just can't take it out to use it for the buying your house.

The company needs money. We have to do this in a uniform way. And you could even do it in a way where let's assume that the distributions to the HR committee are going to be, they will be disproportionate than the children, but then you could actually gift them some of those that cash to to help them out.

But it's the idea of separation of the entity and them as executives and then them as shareholders. And I think that's a good way to go. And I think another way to do that with them is have them have their own incentive plans, like just like people have incentive stock options.

You know, there's a lot of different ways. There's what we call it, EIP plans, executive and performance plans. So you could actually do something with their stock in order to do that, where they get more as the company does better, maybe some type of special pool.

So I think that that is a big item because then you're setting expectations on an annual basis and that it's just not a piggy bank. Now, the parents got to do the same thing, though. They can't treat it as we're going to take out money anyway.

We can't otherwise that, you know, you'll not accomplish your goal. But I think that's a good way of a start. And then you adapt to each situation that you have.

So one of the things that I do with the in these situations is I do I say exactly what you said. First thing is let's bring in a fractional CFO and have the fractional CFO give you an overview. They can come on a project basis for three months and do and take a look at the entire financial system and make recommendations for normalizing financials and creating a financial structure that makes sense.

And if you have a bookkeeper, if you're a smaller business and you or an office manager and you actually need a controller or you have a controller and you actually need a CFO, that recommendation will come out then. And it's better to get that done before you talk about any type of transition or any type of kids coming into the business and overseeing any of that stuff. And then the second thing, the fractional HR person or the HR consultant come in and just normalize everything from an HR perspective or even better.

And I don't know how you feel about this. I'm kind of curious about your opinion. I always tell them, just get a, just bring in a PEO because you're going to bring in the PEO.

The PEO is going to normalize everything for you. All your I-9 information has to be correct. Your payroll will have to be correct.

You'll be paying the right payroll taxes and all that stuff. And then if you decide after your year contract is up that you want to take that back, everything's straightened out and you don't have to worry about it. What are your thoughts there, Harry? No, that's, that's, you know, you bringing in a part-time CFO and PEO, it's a nice way to bridge that.

So you're, you're not doing all the heavy lifting. I think that's important. Getting back in one of the comments I made earlier about like distributions and that, you know, it's a great time if you have that banker on the board, let's say, because obviously they're used to lending money.

They understand. The other thing that you can actually bring up to the second generation is should we be buying another small company? Should we be using that excess cash to really grow this? Because the more we grow this, the more you benefit from it. You know, we're going to be taking care of it.

We want you to be taken care of. And then that way you could actually say, okay, we're going to, what we're going to do for that acquisition is the company is going to run it, but the two of you are going to own it. Interesting.

Okay. You know, there's a lot of different ways to slice that and create things. And you can just imagine the eyes being open when you say you would do that for them.

And they might come back and say, no, we want to keep it in the company, which would be fine. But the mere fact you thought about them expanding in that way would be huge. All right.

So I'm the patriarch and you're, you're our accounting firm and you know, you, this is our quarterly meeting and I sit down with you and I say, Harry, I'm thinking, I'm thinking about the kids and they're going to, you know, one of them is working at another company now and the other one's going to graduate from college. And I want to slow down. I'm thinking about doing some sort of a transition.

Give me your, what's your checklist? What's the, what's the Sandrowski corporate advisors checklist for getting ready for that? You're, you're going to advise me, your client now, what should I do over the next three to five years to make this as smooth as possible? Well, I'm not going to give you all that free advice. No, I'm buying you the lunch, Harry. It's an expensive restaurant.

I think, I think the first thing is that you kind of look at is what is the patriarch and matriarch trying to accomplish for themselves? Because you might have a low enough threshold that the business is already generating enough for them to live on and you're going to have to find out whether or not they're going to want to ramp up their lifestyle a little bit here and there. The first thing though, is, you know, you got to ask people, you got to ask hard questions like how, what's everyone's health? You know, do we have any considerations, you know, down the road that if you were to leave the company, you know, do we have enough money to pay for that 10 or $15,000 a month medical for being in a home or whatever? So I think you really need to think about, you know, what that is. And those numbers get to be big relatively soon, um, you know, depending on what you're doing.

So I think you need to focus on that first and then you can kind of shape a plan for them to say, this is how we can take it to the next level. And then when you explain that to the second generation, you can say, okay, look, mom, you think mom might need some help or whatever the case may be. It's a much easier conversation because then you're blending in the emotional part along with the financial part.

So I think that's always good to do there. But then you start setting expectations and they kind of lay out to them to say, look, in three years, guys, this company is going to be worth X. You guys are going to be the main owners of that. You're going to have a very nice life.

You guys need to get along. We need to bring in other people. You know, we need, might need a COO or running, you need a real crackerjack, you know, CFO or general counselor, someone, it just creates a much better situation because the planning's in there and then they can also plan their life and their lifestyle along with it.

Because it usually, a lot of times the second generation, it's the lifestyle that comes that, that screws everything up. You know, it's good. It's, that's the bad formula.

Yeah, no, no. I, I, I've seen it. I appreciate it.

I see exactly what you're talking about. Okay. So if you want the full advice, not only will you take Harry to lunch, but you can also reach out to him and engage him and his company, him and his CPA firm.

They're a member of Prosperity Partners. So if you're listening to this or you're watching this anywhere in the United States, you can work with Harry. You can work with members of Harry's team.

They know what they're doing. And you can reach out to Harry at 866-717-1607, 866-717-1607. Harry and his team are available coast to coast to help you with these complicated decisions.

Now, here's the thing. It's not just your business. It's also your family.

So you want to make sure you're doing the right thing, but you also want to make sure you're doing the right thing for the business, 866-717-1607. Sundrowski Corporate Advisors, they're a CPA firm with a different perspective. They're a member of Prosperity Partners.

They can work with you anywhere in the United States. Harry, thank you for the wise advice today. We really appreciate it.

You're welcome. It was fun. Alrighty folks, that'll do it for another edition of the Inside BS Show.

We will be back here again tomorrow with another edition of our show. Until then, here's hoping you make a great living and live a great life.