No. 25: When G1 says “No” to additional owners

More than a few times in my consulting career, G1, individually or as a group of similarly aged founders (or G1 for Generation One), says “No” to admitting new, next-generation owners. Alternatively, the answer is “Yes,” but for a relatively nominal amount of equity (i.e., 3% or less) and with no promises or hint as to when, if ever, a next gen (G2 or G3) owner might acquire more.

Sometimes the issue centers on the specific person being considered for an equity interest, but more often the issue is tied to the underlying mechanisms of the process. Here is a short list of the common concerns that often serve as the basis for G1’s reluctance:

• Dilution of the profit distribution dollars
• A change to the governance structure or voting power
• A preference to one day sell the business for maximum value to a larger, outside buyer
• The business valuation and the resulting stock price is too low  
• Next generation’s work ethic (or lack thereof)
• An obvious need for seller financing, and the unwillingness to provide it
• The thought of a succession plan as equivalent to G1’s retirement or exit plan
• Resentment of G2/G3s buying in using business cash flows (i.e., profit distributions)

Next gen ownership prospects need to be ready to deal with these issues whether they’re based on facts or emotions. As a consultant faced with this situation, I start by suggesting that both sides learn more about the succession process—there are a lot of misconceptions. Of course, this is also why I author these books and why I wrote one specifically for the founding owners and a new book specifically for next gen owners. My initial advice is pretty straightforward. Read more. Learn more. Ask questions. Talk to each other.

I also strongly encourage the current owners and prospective G2 or G3 ownership candidate(s) to work through the math using a pro forma spreadsheet process. Do the math and make a decision from the facts. If “No” is still the answer after working through the numbers in detail, perhaps a specific reason may come to the surface that can be addressed. The benefits for a founding owner to gradually sell their equity over a longer time horizon are many – if they take the time to see the full picture.   

And, sometimes, “No” means “No”. The only options are to stay and work and negotiate a better compensation package, use some form of synthetic equity, or to walk away before investing any more time.

The take away from this blog isn’t how to overcome the founding owner’s objection as to additional, younger owners – it is figuring out G1’s ownership plans soon enough to do something about it one way or the other. So, G2/G3, start asking!

Thanks for reading,

David Sr.