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When Family Ties Lead to Growing Pains

The younger generation is taking over, but the founding father is averse to their growth strategy. Is an outside investor the answer?
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Dear Norm,

Four years ago, I took over operations of my father's company. I changed the business model and doubled our sales. Two years ago, my father agreed to sell 60 percent of the business to me and my brother-in-law, our head of IT. My father, who no longer works here, will retain 40 percent of the stock. The problem: We have different visions for the company. My brother-in-law and I are eager to grow the business to its full potential. My father doesn't want to spend his retirement fund on that or let us fund it with bank debt. Our daily battles over this are hard to bear. How can I find an investor to buy my father out and supply the needed cash without jeopardizing the family relationship?

--Peter Sauer, Vice President of Operations, Educational Sales, Tempe, Arizona

Entrepreneurs often fantasize about a white-knight investor coming in to rescue them from a difficult situation. Unfortunately, such fantasies often omit the fact that investors tend to have their own needs and priorities, which may or may not coincide with yours a year or two from now, even if they seem to align perfectly today.

Granted, you sometimes have no alternative but to seek outside equity, but Peter Sauer is not in that position. His company is in great shape, with strong earnings, no debt, access to bank credit, and good growth opportunities. All that's stopping him is his father's aversion to debt. That problem could be solved if his father would agree to sell Peter and his brother-in-law the remaining 40 percent of company stock, to be paid for over time out of profits. They could minimize his risk by agreeing that he could take the company back if they failed to make their payments.

I suspect that's what Peter's father wants, in any case. Why else would he be letting them buy 60 percent of the stock? Peter and his brother-in-law should at least offer him a choice--agree to such a plan or give them permission to seek an investor to buy him out. My guess is that he would greatly prefer the former. Selling to people you know is always better than selling to a stranger, whom you won't really know until you've worked together for a year or two. Peter agreed it was worth a shot and promised to let us know what happens.

 

Last updated: Mar 21, 2013

NORM BRODSKY | Columnist

Street Smarts columnist and senior contributing editor Norm Brodsky is a veteran entrepreneur who has founded and expanded six businesses.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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