You want to always have your business be sale ready. In this episode we talk about why sale ready is crucial in a family business if you want to pass it to your children. You'll walk away from this episode knowing that having the right people in the right seat is one of the secrets to building a business that can scale and be personally and economically sustainable.
Stephen Shortt has spent his entire adult life (and most of his childhood) in family businesses - as well as starting a few of his own. Having bought both family businesses from his parents and growing them internationally, Stephen learned a lot about successful succession planning - as well as making some mistakes along the way...
Stephen is the former global chair of the Global Student Entrepreneur Awards which supports young, emerging entrepreneurs in over 50 countries around the world and served on the global committee for EO Accelerator which supports entrepreneurs who want to scale past 250k per year.
Stephen is a strategy facilitator; team development coach; leadership coach and personality profiler.
Narrator: Welcome to Cracking the Cash Flow Code where you'll learn what it takes to create enough cash to fill the four buckets of profit. You'll learn what it takes to have enough cash for a great lifestyle, have enough cash for when emergency strikes, fully fund a growth program, and fund your retirement program. When you do this, you will have a sale‑ready company that will allow you to keep or sell your business. This allows you to do what you want with your business, when you want, in the way you want.
In Cracking the Cash Flow Code, we focus on the four areas of business that let you take your successful business and make it economically and personally sustainable. Your host, Josh Patrick, is going to help us through finding great thought leaders as well as providing insights he's learned through his 40 years of owning, running, planning, and thinking about what it takes to make a successful business sustainable and allow you to be free of cash flow worries.
Josh Patrick: Hey, how are you today? This is Josh Patrick. And you're at Cracking the Cash Flow Code.
And, today, my guest is Stephen Shortt. And Stephen is from Successful Succession. And if you're watching us on YouTube or Facebook, you can see his URL which is successfulsuccession.com. Stephen is an expert at family business transitions which is what my new book is about. So, I'm sure we're going to have a great conversation.
So, let's bring Stephen in and start it.
Hey, Stephen. How are you today?
Stephen Shortt: Hey, how are you? You well?
Josh: I'm well, thank you. How about you? I'm going to bet you are, too.
Stephen: Well, the sun is shining here in Dublin, so life is good.
Josh: Okay, that's good. It's humid here in Vermont and I hate humid but that's besides the point.
So, let's talk about family succession. You know, family succession is different than just selling a business to a third party.
Stephen: Yeah. I mean, there's an immense amount of baggage that goes along with it. So, when you have grown up in a family business like I have, I've grown up with two family businesses, the kitchen table and the boardroom table are the same piece of furniture. So, there is an awful lot of baggage that goes along with everything to do with transitioning, with moving, pivoting, changing, and how different people evolve.
Josh: So, what kind of differences or what things-- if I'm going to sell the business to my family, and I'm a big fan of selling not giving, by the way, so--
Stephen: I bought both of mine.
Josh: Yeah. I think it's a really bad idea to give the business to your kids. I think if you sell it to ‘em, then they get some value behind it.
I'm going to sell the business to my kids. What do I need to be looking at that's different than if I'm going to sell my business to either my managers or to an outsider?
Stephen: Well, I guess, if you're selling it to an outsider or your managers, you're probably going to stay on in some capacity in an advisory role or some kind of overlap for a period of time. And it's much easier for us then to actually go, right. Well, we are, over the next six months, three years, or whatever. Two years is really the max that I'd stay. But some people might stay on for three. You start to step back. And because it's a different person, it's a different entity, it's easier for the entrepreneur - especially if it's the founding entrepreneur, to step back from their baby.
When it's family, you don't get that two‑year window that you're always around because at Christmas, in two years’ time or three years’ time, you're going to be sitting down going, “How is that client or that person rang me? Why are you not bending over backwards for that client that I brought in 40 years ago?” “Because they're annoying and they waste all of our resources” And all of that baggage that goes along with it. And that it's a really important mindset that the current generation has to have to hand over the baton to the next generation.
Josh: So, I have a piece of advice I always give selling owners, you know, the parting owners. And I don't care who's the next owner of the business. They're essentially going to hate pretty much everything they do.
Josh: And with family, they still have the opportunity to tell the kids, they hate what they're doing.
Stephen: Without feeling guilty because if you're talking to somebody, who you have a professional relationship with, you can kind of go, “I'm not so sure about that.” But it's cleaner. Whereas, with a kid, you're always going to see your kid as that kid who you have to help when they graze their knee, when they fell off their bike, when they were three years old. So, there's always going to be that instinct,
Josh: Well, what I find a lot of times is the parent still is keeping baggage around of when their kid was eight or nine years old. And they forget they're now 35 and a completely different person, and maybe even have a different way of looking at things.
Stephen: It's a really interesting thing, especially when you see families who don't spend a lot of time together. It happens a lot more in the States where one person would live on one coast, for example, and one person would live on another coast. They'd only meet two or three times a year for family, for Thanksgiving, or things like that. It's amazing how quickly we regress back to our childhood and we actually start to take on that persona. We could be running a very successful business on the other side of the country but, when we're back in that environment, in our family home, with those dynamics and those routines, we immediately start to regress into that. And that can actually be very difficult, psychologically, for the current generation to hand over the next generation because the kid does need to step up a little bit.
Josh: Yeah, I actually have two experiences with our family transition. One is, I bought a business from my father. And he was a royal pain in the neck, I could say something else, during the 20 years I owned the business.
Stephen: I'm Irish. I've heard it all.
Josh: I'm sure you have but we like to keep this clean for our friends at Apple.
Josh: And he was a royal pain in the neck. I mean, he would come out-- he had opinions about every darn thing I did. And, finally, after 20 years, I sold the business when I was 44 years old, went into the wealth management business and then consulting. And during the 20 years he was alive, that I was running that business, he literally had nothing to say as far as what I should be doing. Whereas, he drove me crazy, because he understood the industry. And when he didn't understand the industry, he didn't say a thing. That might be one of the reasons kids don't want to go into the family business.
Stephen: Yeah. So, in the keynote that I give, I mean, there's a couple of mindsets that I want people to go away with. And the first one is this idea. And you've encapsulated it really beautifully here. If we think of any story in the history of stories, there's a book called Hero of a Thousand Faces. So, the most well‑known story in the world, across all cultures is the hero's journey. So, there's a process to this where somebody sets off and they have the status quo. Then, they either meet somebody or they find a goblin and then they go into what's called the special world. And that's where all the change happens. They come back as a different person.
So, if we take it that every entrepreneur is the hero in their own hero's journey, it gets to a point where they-- first of all, they need this mentor or a sage person. And, when they come full circle, the next generation is then going on their hero's journey. So, we, as entrepreneurs, we need to go from the heroes of our own journey to the mentors of the next generation’s journey. And that is a real mindset shift in helping them to succeed in their journey. It's not our journey anymore.
Josh: Which is what I really liked doing a lot these days is, they should hire an outsider to be the guide for the rising generation. And I actually find that to be a much better thing. One of the things I-- in fact, I have a meeting later today about this is it’s what I call the leapfrog manager, where we bring a manager in who is a senior‑senior manager, will become the president of the company, the COO or president of the company. And their main job is to train the rising generation to be an adult and able to take over the business.
And, at some point, when mom or dad moves on, then we do a leapfrog where the rising generation now becomes the CEO and the boss of the COO. And it's often a much better transition because they don't have the family baggage that their parents bring. I hate having parents be managers of their children. Worst thing that you can ever do. It’s not the worst thing, but it's one of the worst things you can do.
Stephen: So, I would push back on that a little bit. I think, if we can get the mindset right and if we can actually get-- so, a lot of the onus is on the current generation to actually shift their thinking to do what's best for the next generation because they're doing what's best for the business as a whole. But part of it is the changing from hero to mentor and becoming that somewhat impartial person because, at the end of the day, the parents are going to have the best interest of the business and the kid. It's just how they go about doing that. Because the other thing that we need to get the current generation to understand is what got the current generation here is not going to get the next generation there. So, things are going to have to change. Things are going to have to adapt. And the skill set and the experiences that the current generation have is exactly what brought them to where they are today but it's not necessarily what's going to bring the next generation forward. So, they need to be able to let go of some of that and understand that what they're giving is not going to be held necessarily as canon.
Josh: Yeah, that really comes into an area of skill that most business owners never really learn very well and that's how to delegate effectively. I mean, my experience is, if you're a good delegator, to start off with, and you actually do let people do their work after you send it to ‘em and you're not a helicopter manager, meaning you're looking over their shoulder every five seconds, you're likely to have a better transition than the business owner who still is in control of everything, is not a good delegator. In my experience, they are terrible at making that transition. And, frankly, that's where most of the family business transitions are, at least in the US, is with small companies and not in big companies. You know, big companies pretty much have it down. They know how to do the succession issue because they've done it with a whole host of managers.
When you’ve got 25 people, mom or dad has never been anything but the hero. And they don't know how to be the guide. And, frankly, when you're a great delegator, you've made yourself the guide and not the hero and you've learned to lead from the back.
So, in my experience-- this is just my experience, it's very, very difficult for parents in smaller businesses, under 50 people, to make that transition to their children, where they're going to be an effective mentor or guide. They just don't have it in their DNA.
Stephen: So that's where I would suggest that somebody like me or an external consultant, as you mentioned, would come in to actually help them to build that framework and to build those routines and those rhythms because sometimes it's actually just identifying because people are-- and this comes back to identity versus reputation, like how we see ourselves and not necessarily how other people see us. The age‑old thing of we judge ourselves by our intentions. We judge others by our actions. But we don't actually acknowledge that other people are judging us by our actual actions, not by our intentions. And sometimes having that and doing some personality work and doing some dynamic cultural work can really help illuminate that for the current generation and get them to see the benefit of changing some of their habits.
Josh: I mean, I absolutely agree with that. I have many coaching calls a week that are on that very, very particular topic where we start talking about, “Hey. Well, first, we have to get the child to start acting like an owner and not like an employee.” That usually takes a couple of years. And then, we need to get the parents to understand the child is going to do it differently. It may be better. It may be worse, but it’s going to be different. And most likely it’s going to be better because their mindset is different. They're not clawing for the first dollar.
Stephen: So, it's going to be better but, from the from the current generation’s point of view, it's going to be worse because it's not exactly the same way that I would do it.
Stephen: So, it's, therefore, not correct.
Josh: Right. Right.
So, there's something that children need to do, at least in my experience, to get their parents to let go. And that thing is they need to show true appreciation for what their parents have created. And if they don't do that, the parents are just never going to let go. And until you do that, there's never a transition. Is that your experience?
Stephen: So, when I took over my first family business, there was a lot of tension because I was trying to move things probably quicker than they were comfortable moving things, and going in a more digital way, and using more technology to be able to run the business more efficiently, but it was releasing a lot of the micromanaging side of things which was bottlenecking us a little bit. There was a lot of tension in that until I came to that point of actually sitting down, as you say, with my folks going, “Look. What you’ve built is amazing. I mean, I wouldn't be able to do these things if this business wasn't here. Like I wouldn't be able to grow the business from this point. I'd have had to grow it from the beginning. So, I really do appreciate it. But this is the next evolution. This is the next chapter. And it has to be done this way. Otherwise, it's all going to come crashing down because the market has changed. And what got you here is not going to get the rest of us there. So, we need to evolve this.”
Then, when it came time to convincing my folks that it was time to sell that business, that was another thing of letting go. “So, why don't we do this?” Because, for them-- I mean, they had blood, sweat, and tears for decades put into this. And I had blood, sweat, and tears for less decades but a long time, still. When we actually had these conversations and we're really objectively looking at things, we could see, “Look. This is this is the best decision. For us, as a family, it's the best decision for the team to be able to join a bigger team and sell to somebody who's in a bigger consortium so they can actually have more benefit rather than us trying to reinvent that wheel.
Josh: Yeah. That makes tons of sense to me. I mean, the amount of trepidation I had when I sat down with my father and said, “It’s time to sell the business” was unbelievable.
Now, the good news was he saw the same things I did and saw the same reasons for selling that I saw. So, we didn't have any conversation about being the right thing. There was no question for both of us it was the right thing.
But still, sitting down with somebody who had built the business from scratch, went in at six o'clock in the morning, filled orders, went out and filled the machines, came back and did all the stuff that you have to do to start a business which is really, really, really hard work. Tell them that what they've created is not viable anymore and we need to do something about it was a really difficult place to be. I mean, you had the same experience I think everybody has. That experience if you get to the point where you need to sell the business and, unfortunately, that happens a lot.
Stephen: Unfortunately, I would argue that it doesn't happen often enough. And I think that there are people who get trapped in this cycle of they go into the four things you can really do with a business. You can stop it and it just goes away when the founder dies or the current generation decides, “We're not doing it anymore”; you can sell it which is fine; or you can survive, which is essentially, to me, just a prolonged stop because you install somebody or you keep doing things the same way as they've always been, the market is changing around you, and it's just a really slow painful death until it's no longer in your hands and the bank or somebody else comes in and shuts down your baby and you have no control over it. So, that's why I'm most interested in the fourth one which is scale, which is actually putting the right people in the right place to scale the business.
Josh: Yeah. Well, I think that-- I mean, most people I know who are working as outside consultants, that’s their-- let's build what I call an economically and personally sustainable business. Let's build that. And then, we can decide what we want to do because then we build something of value and we have options. If we hadn’t built a sustainable business, which is essentially a business somebody else would want to own, we really don't have a lot of options of what we can do with the business.
Stephen: But also, a business that somebody else can own that doesn't require you coming into the office every day or--
Josh: That’s where the concept of passive ownership or operational irrelevance-- and I can't come up with a good term for it.
Stephen: Yeah. You mentioned-- I really like the idea of it, but it's-- yeah, it needs--
Josh: People don't want to be irrelevant in their company. And that's the truth. And they like the-- once I explain to ‘em what operational irrelevance means. And all that simply is, is you're not involved in the day‑to‑day operation of your company at all. You're only doing strategic activities and you have a team that's running the company. They love that idea.
Stephen: So, something like ivory tower management or something like that, so?
Josh: Yeah. That’s--
Stephen: And yeah, there’s something. There’s negative connotations.
Josh: I'm probably going to end up using passive ownership because that doesn't seem to offend that many people. At least, any more than I normally offend people.
Stephen: Well, I mean, look, again, I'm Irish so we could get into this, but you want to keep this in Apple, so we'll stop there.
Actually, this is one of the things that I actually love about family businesses is that you can have these really, really offloading, very quick conversations. Now, you can have a lot of baggage and the stuff that happened to you when you pulled your sister's hair at 16 years of age and she hates you for it. Like, there's all kinds of stuff that can happen, which is irrelevant to the business, but at the same time family businesses have this ability to actually have at it with each other, have a flare up, and actually move on with things very, very quickly. That doesn't happen in--
Josh: Yeah. If the family is not dysfunctional. The--
Josh: The truth is, you know, a lot of times these flare up’s happening with where the kids or the parents-- mostly it’s the kids, especially with today's kids. And I'm not dumping on millennials, so let's not go there. They can't let it go. And if they can't let it go, then they can't be in the business. It’s really that simple. And it's fine for them to go off and do something else. And parents need to stop trying to make their kids, or guilt their kids, or bribe their kids into working in the family business when they can't even have a civil conversation at Thanksgiving, or Christmas, or any other holiday.
Stephen: No. Absolutely.
Josh: At least, that's been my experience over the years. So--
Stephen: But one of the things that I think for family businesses, and this ties in a little bit to what got you here, won't get them there. It's not always the best idea to have the next generation join the family business. For me, the better way of looking at it is “How can we help the family business to join the next generation?” So, what do we need to change? What levers-- what minor changes do we need to make now to go, “Okay. Well, so, my daughter has this type of personality and this type of interest which could feed into this part of the business. Not the part of the business that I'm spending most of my time in but there’s another part of the business. And we can actually help our children to be entrepreneurial with a headstart. They have this family business. They have this basis. But the business changes to fit them, as opposed to them changing to fit the business and ending up being miserable and having problems in 10 years’ time.
Josh: Yeah. I was talking to the head of the Family Firm Institute a couple of years ago and I was asking her about, you know, how many family businesses are actually are in the world and how many get transferred? And the research that FFI uses all the time is about 50 years old. So, I said, “Maybe you should bring that up to date a little bit.”
Stephen: Yeah, [inaudible 00:19:27].
Josh: But she said something that was really important. I think she said, “We no longer think of family businesses. We think of families in business.” And that means that the family business may not be the centerpiece of the family. It might be you have one business, another child has another business, another child has another business, and we've been lucky enough to have enough resources to help these kids start their businesses. That's where the concept of a family bank comes from which is a pot of money that families use to start businesses, and buy houses, and do education for kids. You know, typically, these are very successful families that do this. But still and all its families in business, not a family business. And if the family business fits in to the portfolio, then they should stay.
Stephen: Mm-hmm. I like that concept, actually. I hadn't heard that not family business, it's families in business. I like that idea, actually.
Josh: You know, I find that, often, you're better off sending a child off to start their own business than try to force them into a business they have no interest in.
Stephen: In old Ireland, back in the Celts like pre‑BC, back in the BC times, we had a concept in Ireland called fosterage where the next generation of the clan members will go and actually live in another clan, a friendly clan, not a warring clan. They will go and live in a friendly clan for about three or four years. And the other clan will be responsible for training that young person in the ways of their clan, also the ways of Celt law, music, sewing, farming - all of the things that they needed to do before they return to their original clan to take up leadership positions within their organization.
So, I know a lot of family businesses, some of the bigger ones, the ones that have more structure that you were talking about, they would say “If you want to come in at a senior level, you have to have achieved that senior level elsewhere to come in.” You can't just roll out of bed one morning and go, “Right. I'm going to be the VP of marketing now because I have a Twitter account” because that's just going to be horrendous.
But a lot of smaller businesses, a lot of smaller family businesses, they do feel that they're defaulted to that. They go, “Well, I need to give something for my son because he can't get a job anywhere else. So, I have to bring him into the business. And I have to bring him in senior” or something like that without actually having him learn the ropes and start from the bottom to work his way up.
Josh: Yeah, that's really good advice. I call that having a family business constitution where you have rules. Before you join the family business, here are the rules. And you gave one of ‘em. If you're a janitor at your outside company you're working at, you start at our company as a janitor. If you're the CEO of an outside company, it's about the same size, but you can come in the CEO here. But you can't come in as a CEO if you're a janitor.
Josh: So that's right.
Stephen, unfortunately, we're going to have to leave it there because we are out of time. And, you know, I find this with a lot of people who are good at what they do, best practices are pretty much all the same and you're showing all the best practices. So, I'm assuming there are people, who are listening, are going to want to one find you or talk to you. How would they go about doing that?
Stephen: Easiest way is to go to successfulsuccession.com. So, I'm Stephen Shortt from Successful Succession. So, that's all the S’s that you could possibly find in branding. So, my email is email@example.com. There's a contact form on the website. More than happy to have a chat with people and jump on a call.
Josh: And I have two things I'd like you to do. The first is, I want you to go to wherever you're listening to his podcast and give us an honest rating and review. It's really important. And the more reviews we get, the easier it is for people to find us. And the easier people find us, the more people listen, and we get the word out better which is what the whole purpose of this podcast is.
And the second thing is my second book has just been published. It’s called the Sale Ready Company. In fact, we have talked about almost half the themes in the book we talked about today. Because this book is a business parable, it’s about a business family who is getting ready for the senior business owner to transition out. And we have a dysfunctional son who shouldn't be there in the first place. We have a daughter who's green. We have a manager who's in place. And you get to learn about what all these characters do along the way to help the owner, John Aardvark, get ready for retirement. So, go to www.salelreadycompany.com. You get the book there for free plus‑shipping which means you pay me $7.95. We ship you the book. I'll even sign it. And we have a free resource center with nine or 10 pieces of content in there which will tell you specifically how to do the things that we talk about in the book.
So, this is Josh Patrick. We're with Stephen Shortt. We're at Cracking the Cash Flow Code. Thanks a lot for stopping by. I hope to see you back here really soon.
Narrator: You've been listening to Cracking the Cash Flow Code where we ask the question, “What would it take for your business to still be around a hundred years from now?”
If you've liked what you've heard and want more information, please contact Josh Patrick at 802-846-1264 extension 102, or visit us on our website at www.sustainablebusiness.co, or you can send Josh an email at firstname.lastname@example.org.
Thanks for listening and we hope to see you at Cracking the Cash Flow Code in the near future.