“He said, ‘if you came up with a million dollars, I’ll be out the door tomorrow.’ He says things like from time to time, but I definitely don’t have a million dollars. Even if I did, I don’t know if I should give it to my dad. The whole thing is quite overwhelming, to be honest. He pays me $90K a year. A million dollars seems like an enormous amount of money to me. Matt. What do I do?” He put his pen down and looked up finding a look that said he was struggling to even articulate the actual problem. Not quite pain, but certainly not relaxed. Concern mixed with anxiety. He started wringing his hands while I waited to see if he had more to say. 

His dad was given my book by his banker, read through my blogs, and called me in for an interview. He started out by saying, “I need someone who will help my son figure out how to get the financing done to buy me out.” That was over a year ago.

“What do you think is your worst case scenario?” I posed the question so as to address his greatest fear source with the hope that once we decide that scenario won’t happen, confidence will start to build. I leaned back and waited for him to consider how to respond.

“I suppose it’s that once I get my dad the money, that he won’t be around anymore. That is, even if I do come up with the money. I know that’s not reasonable, but I like working with him and part of me doesn’t want to see him leave.” The honesty of his own confession settled into his ears and made its way down from the thalamus to the amygdala.

“Well.” I started with as much caution as I could muster. We were entering sensitive territory. The relationship between a son and his father is well documented as quite essential to a man’s identity. Add the component of the potential loss of a mentor, a leader, a coach, and an icon and the emotionality can tend to take over even the most left-brained leaders. “Have you talked to him about this concern? Perhaps he’d be amiable to some sort of temporary or part-time support. Come around as you wish and kind of look over your shoulder, if you want it.” 

After continued discussion around his emotional concerns, we unpacked the numbers and what we discussed is traditionally called a leveraged buyout. This is when an existing operation finances the buyout of an owner. Banks sometimes support their existing clients with these types of loans. Often, the SBA will guarantee a portion of the loan. Getting the financing done for this type of transaction is just one step in the process. I’ve handled dozens of these types of financing needs before, but there’s usually a psychological component that needs to be addressed and this situation was no exception.

His dad, for reference runs a quite successful service based company that is most certainly worth at least a million dollars just in assets. The cash flow that it generates is enough to afford the dad the type of lifestyle many entrepreneurs dream of; fishing a month during the summer; skiing for a month at his house in Denver during the winter; taking lots of time off or away from the company with the confidence that things will continue to run smoothly. 

Structuring a buyout is never an easy process. However, there do tend to be similar steps and a process you can follow if you find yourself in this situation; being the next generation of business owners in your family genealogy.

I’ve been working with generational business owners (those who have their grown children working in the business with the intention of, one day, passing the torch along to the next generation) with things like succession planning, continuity of financial reporting, loan structuring, and leadership development for over ten years now. I find the work just as fulfilling as challenging; there are always curveballs.

The key is to work through the steps and not to try and do them all at once. Some require reflection, others require communal advice, while others need additional information. Here are the things I told him when he asked for help “financing my parent’s buyout from the company.”

1. What’s the purpose of the buyout? Quite literally, and in plain terms, what are you hoping to accomplish?
2. How intimately do you understand the operations, the finances, and the flow of information within the company? 
3. How confident are you that you can continue the business? 
4. What cash flow impacts will be made as a result of the buyout? 
5. What are the plans for the future?

Generally, if you feel confident about the answers to these questions, it’s time to put together a Letter of Intent. Many times, you can draft this by yourself and they don’t tend to be legally binding. Here’s my disclaimer that I’m not an attorney and this shouldn’t be misconstrued as legal advice. Instead, I would encourage you to draft the LOI yourself and then review it with an attorney who specializes in business transactions. 

While considering the legal ramifications, you’ll also want to consider the financial implications. Sometimes the new debt may be cheaper than the exiting owners’ total compensation. Or, the new debt could prohibit other financing needs you may have down the road. 

The plans for the future can be as extensive as you want. Typically the bank will want to see some semblance of a business plan. You don’t need to make it 100 pages. But I would encourage you to draft at least 2 pages. Think about what will change and how you’ll lead the company in the short term and through the long term process of executing this change.

If you’re considering financing your parent’s buyout from the company, give me a call. Or, if you’ve been encouraging your son or daughter to buy you out, I can help too. I don’t take on every project, but I do generally give inquirers time to hear their thoughts and we tend to determine together if there’s a pathway forward. 

Call my office today. 847-802-9405.