EntreLeadership - "My Business Partners Are My Parents"

Episode Date: April 30, 2020

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This is a small business theme hour, an entree leadership theme hour. The panel answering your questions, Kent Coleman, Ramsey personality number one bestselling author, and the executive vice president of Entree Leadership for Ramsey Solutions. Daniel Tarty joins us. Let's go to Tommy in California. Hey, Tommy, welcome to the Dave Ramsey show. How can we help? Hey, Tommy.

What's up? I'm 28 and I own 50% of my wedding venue business. I run the business day to day, and my parents, they're really about the large decision. split the other 50. In 2018, we got hit by the wildfires, which caused us to close temporarily. And in the downtime, while we're waiting for permits, I'm going through all our processes and costs. And in that, I'm realizing my parents, since they're not part of the day-to-day, don't

understand what our customers want, but they still try to impart their decisions as a final one, like hiring subcontractors and vendors without my knowledge. They've talked about how they want to be a part of the business in a way where they're just asking how the business is doing and not part of the decisions. So my question is I want to have the discussion about the process of buying my parents out over time in a mutually beneficial way. So I don't know how to have that conversation and I don't know how to put a dollar amount to the percentage. Tommy, I'd be curious to hear. I'd love Ken's thoughts on this too, but you're 28 years old.

You're in a business that it sounds like your partners with your parents. I want to zoom back for a second and start with. Is this what you love and really want to be doing when you're 35? or did you kind of drift into this thing because mom and dad are a part of it? Oh, this is absolutely what God has for me. I love waking up every day doing what I do. Okay. Good.

Well, that's good. So what do you want to be true in a year from now as it relates to the way that mom and dad are evolved, not involved? It sounds like you want to buy them out and have a clean break? I have a great relationship with my family. I think the problem is it's most. Mostly my dad gets a little too involved. And so I don't know.

My idea was buying a percentage or something for that there is a little bit more, I have more decision on that. But I just, that's kind of what I came up with. It wasn't popped with what to do on that. After you are paid a base salary for managing the business, nothing but that. How much profit is left a year? About 600. Wow.

You're profitable 600. So they're taking about 300, you're taking about 300 in profit. Correct. After you were paid a salary. Correct. Okay. All right. So the business is worth roughly 4 to 5x of that number.

That's the value. Okay. And so their half, their 300 is worth somewhere around a million. 1.5. 1.5. 1,0.2 to 1,000,000, somewhere in there. Okay. All right.

Now, the way I would do. it is I would just propose that you give them X percentage of the profits until you reach that number. And it would be in excess of 50%. Okay. Okay. Our agreed buyout number is whatever. Let's agree to a number. And I'm going to give you 80% of the profit until we hit that number.

If you can live on 20% plus your salary, which you ought to be able to, these are incredible numbers. That all makes sense. Okay. And so if we said 80% of 600, that's like a half million dollars. And if it's a million five, three years later, you're clear. I like that. So you need to agree on a price. But the price generally, a small business will sell for somewhere around a 20% to a 25% rate of return to the investor,

which means the cap rate is about 4x. or 5x. Okay. Of the net profit. And their portion of the net profit is 50% if I understood you right. Is that correct? That's correct. Yeah.

The problem is you got two heads, and anything with two heads is a monster. Yeah. And that's what you're discovering. So you need, and with this buyout, they lose the right to interfere operationally. I'm curious. What do you think the chances are they're going to go for this? Do you feel good that they'll go for this idea, what Dave just laid out? I think with a good conversation, it would.

I mean, when we started it, it was definitely something where I was really wanting to do this, and they were willing to help. And they wanted me to run everything to do everything, but they still want to put their fingers in it, even though it's really kind of hurting. Well, I can ask a good question. Dave gave you some great mechanics on the valuation of a business. business and how you would put a proposal together for the buyout. But you may want to have a few conversations just from a relationship standpoint before you come in and start talking, you know,

the buyout and the timeline for that to happen just so that everybody, I mean, you don't want to look up in any year from now the relationship that you have with your parents that is great has gotten really rocky because how you approach this was too transactional. And it doesn't sound like you're going to do that. Sounds like you guys are on a good track. There's a couple things to do that. Being a founder of a business, your dad's not actually the founder. You and him founded it together with his money he got you started or whatever uh and then you took it and ran it and grew it but there you know always honor their position as parents always honor their position in the business and think be thankful and grateful for what you've gotten for this point and that's how

you always start a conversation like that and and and then you say and you know our original purpose was for us to get this thing running and so now the natural evolution of this dad and mom the way for me to continue to honor you is to buy you out. And so I want to give you a large percentage of the profits against a buyout number and cause that to happen. But that's me tipping my hat to you and saying thank you and I appreciate you and I love you. And you've been incredible. And it's the natural evolution of this. Just like when you were raising me, mom and dad, you didn't want me to live in the basement until I was 40.

And this is, I'm starting to be in your basement now. That's true. Yeah, you're giving them a metaphor of some kind that says it's time for me to grow up and grow on. And you have to let me go. I have to move out. I'm getting married. You know, it's that kind of a thing. And so they're getting some psychological value out of interfering, and you need to take that away from them gently.

Well, and just be patient. I mean, when I was 28, I would want all of this to happen in six weeks. It's okay if it takes six months. Oh, definitely. That right there is a very big point. Yeah. I think what Dave just mentioned on the psychology is huge, Tommy. And then what Daniel said is true to.

If they resist this a little bit, you need to relax because you told us all unequivocally. I mean, you couldn't get it out fast enough that this is what you were created to do. So guess what? You're getting to do it. You're 28. Let this thing cycle out. Your time's coming. Yeah.

But it could be gradual, but it does need to see incremental progress with the end in mind that everyone has become starts to be in agreement with. Because what happens sometimes with family businesses to avoid conflict, we kick the can of conflict down the road. And it gets bigger every time you kick it. So it's easier to go ahead and deal with it. Again, not to rip the Band-Aid off and not to be impetuous and not to be immature, impulsive in how you're doing it, gentle and wise and honoring, always honoring those that came before you. You know, one of my favorite things about Nashville is that I know a lot of music people around the world.

I'm not a music person. I'm just a fan boy. But country music people do a great job of honoring the ones that came before them. You know, you have to honor Dolly Parton. You need to honor John and June Cash. You know, you need to honor the ones, you know, Porter Wagner's. You need to honor these. And they do in that world.

And it's a good. It's a good way to make transitions happen. It's classic. This is the Dave Ramsey show.