Succession — Money, Money, Money
Floral Finance®
Contrary to popular belief, the Bible doesn't say that money is the root of all evil. However, it does say that the "love of money is the root of all evil."
Everyone wants money. We jealously guard what we have and, often, envy what others have. Neither is a good practice.
When it comes time to pass along a business, there are many money issues to consider. How much should the parents get? How much should each child be paid? How much is each job worth? How much capital should be left in the business to cover operations and the unexpected?
Carefully planning the way a family business will pass from one generation to the next is a good practice.
Is Your Business Large Enough?
Most retail flower shops are only large enough for one owner. In fact, about 60 percent of all flower shops with a payroll still have annual sales under $250,000.
Of those shops, the average annual sales is about $117,000. Even at average annual sales of $250,000, total payroll for the year, including holiday extra help, should only be $75,000. Not much room for more than one owner.
If you have more than one child who wants to be in the business, make sure the shop is big enough to allow that. If the business isn't large enough and you can't agree on who should get it, everyone will probably be better off if you sell the shop and let the kids go their separate ways.
Compensation
Compensation should always be based upon the fair market value of the services being performed. No more. No less.
Profits at the end of the year can be divided up based upon ownership, but compensation should be based upon position.
If the succession plan is intended to fund the parents' retirement, that money should be divided between income for ongoing services and proceeds from the sale of the business.
Sale proceeds will be taxed at a lower rate than wages and are not subject to Social Security or Medicaid taxes. Consequently, it is to the parents' advantage to allocate the maximum allowable tax to the sales price rather than to wages.
Buyout Rules
To treat shareholders fairly, parents should establish a buyout agreement that will ensure fairness and cannot be stalemated.
Usually, a buyout agreement will include a method for valuing the business and terms for purchase of the share being bought.
Buyout agreements can be complicated. It is hard to anticipate the circumstances that will surround a buyout situation. Often, people become upset and act out of emotion, rather than from reason.
The simplest and fairest buyout agreement has been labeled "The Texas Shoot-out." Here's how it works:
At any time, any owner can make an offer to purchase the share(s) of the other owner(s). The other owner has the following two options:
- He can accept the offer and sell his share for the offered price.
- He can buy the offering party's share for the same amount.
In other words, when someone decides he wants to buy out another shareholder, he must offer a reasonable amount of money because he runs the risk that the other party will turn the table and buy him out — on the same terms.
Of course, that's only part of the genius of this buyout agreement. The real beauty is that there can be no stalemate. A buyout is accomplished — one way or the other. And the price is fair.
Non-compensation Benefit
When more than one sibling is involved, the succession agreement should outline the acceptable "perks" for each position and under what financial conditions those perks can be given.
You want to prevent more powerful shareholders from giving themselves insurance, cars, travel or other items at the expense of others.
Any unfair treatment will end up being resented. Ultimately, it will ruin the business relationship — and more than likely harm the siblings' personal relationship as well. A little prevention will pay off handsomely in the long run.
Succession Planning Is Not for Cowards
By now, you realize there are many potential pitfalls in the succession process.
That doesn't mean you shouldn't take it on. It just means you need to be aware of and address all the important details.
The struggle is well worth it. The reward is a chance to preserve a legacy and pass down family values.