Why Junior shouldn’t take over your business

July 19, 2010

Entrepreneur and author John Warrilow believes business owners are engaging in a “twisted form of child abuse” when they pass their companies onto their children.

In his new book, “Built to Sell: Turn Your Business Into One You Can Sell”, Warrilow offers his advice to creating a sellable company and argues that 99 percent of businesses can’t sell because the companies can’t be run without their current owners.

In a recent telephone interview with Reuters, Warrilow said business owners should have the best possible exit strategy before they consider handing over a company to their children.

“If your business is not worth anything to a third party, why would you want to give it to your kids?” asked Warrilow, who has started and sold four businesses.

The problem arises when owners can’t extricate themselves, leaving them with no exit options, said Warrilow.

“The patriarch or matriarch turns to their kid and says I make X amount each year, why wouldn’t my kid want my business?” he said. “What you’ve done is you have a business, but you haven’t made it a valuable business for a third party to want to buy. The only exit option is to give it to your kids.

“Well you’re basically ensuring your kids will be handcuffed to this business for the rest of their lives, unless they’re successful in changing the business model.”

Warrilow doesn’t think owners are doing their kids any favors by passing on a business they may not want, that may make them feel inferior by being in their parent’s shadow. Suddenly putting one’s child in charge may also alienate the employees of the company.

“I know a guy who has his own business who hired his 23-year-old son (fresh out of college) to be the vice-president of marketing,” said Warrilow, noting it probably didn’t sit well with the other employees “who’ve been slaving away for years” at the company.

Options available to owners include selling their business to a strategic buyer, corporate refugee (someone who’s been downsized or displaced from a corporate career), a company manager, a private equity group or to  go public. Warrilow said selling one’s business to the company manager is an excellent option, but the company’s valuation will be much lower.

For owners who don’t know how to devise an exit strategy, Warrilow said they should set up an advisory board with other entrepreneurs on it.

“Talk to people who’ve done what you want to do.”

Photo credit: Sebastian Rizzo (L), 10, helps his father Dominique Rizzo (C), with the morning rush of customers at the family run La Boulangerie bakery in the Garden District of New Orleans, Louisiana October 9, 2005. REUTERS/Lucas Jackson

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