Gary Pageau of the Dead Pixels Society talks with Mackey McNeill, CPA, of Mackey Advisors and author of The Prosperity Playbook, about considerations for family business succession. McNeill describes what factors to consider when passing on or selling a business.
"The Prosperity Playbook: Planning for a Successful Family Business Succession" is about successful business sale or succession that requires careful thought, detailed planning, and a generous amount of fortitude to complete this process.
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Erin Manning 0:02
Welcome to the Dead Pixels Society podcast, the photo imaging industry's leading news source. Here's your host, Gary Pageau.
Gary Pageau 0:10
The Dead Pixels Society podcast is brought to you by Mediaclip, Photo Finale and Advertek Printing.
Hello again and welcome to the Dead Pixels Society Podcast. Today we're joined by Mackey McNeill, the CEO and President of Mackey, a Cincinnati-based firm focused on family business. I Mackey, how are you today?
Mackey McNeill 0:31
I'm great. How are you? It's good to be with you.
Gary Pageau 0:35
Good to have you. As we were talking about before the show started a lot of our listeners are family businesses their second sometimes even third-generation businesses that have been around. And they're really coping with challenges related to how do we pass the business on? What are some of the considerations that a business owner needs to look at when determining who they're going to pass the business on to?
Mackey McNeill 1:01
Well, I think in terms of her, that's a great question, Gary. And in terms of who the first thing to look at is, who has the leadership potential to take the business to the next level, because you know, when there's a transition, so let me qualify, if you're going to give your business to your children, and you don't need any money from it, maybe you don't care. But if you're expecting them to pay you, which most most people do, because most business owners, a large portion of their assets are tied up in their business, so they'd like to get some cash flow from it when they when they relinquish it. So in that case, I think I think believe it's really a question of who is the best leader of your if you have multiple children, or if you have an employee, key employee, who do you feel like can not just be a person who runs the business, but who has some vision for the business, because, you know, business is that as a living organism, it changes over time. And as the world changes, we need to change and adapt with it. So who is in your organization that has that kind of vision,
Gary Pageau 2:01
You raise a great point, because the business that many of our listeners inherited was very different than what the business is now maybe then they started with a film processing business. And now they're printing completely digitally on to aluminum, wood, paper, and all kinds of other services. So the business is really changed in terms of identifying trends for the future, because as you said, a lot of owners their assets are tied up in the business. So they need they need something out of the business. What are some of the leadership qualities that they should be looking for? Is it is it the vision side? Is it the people side? Is it you know, the financial side?
Mackey McNeill 2:41
Yeah. Yes, I'll tell you my favorite way to pick your successor, and there are others. But my favorite way is to put together a board of advisors, not a board of directors, but a board of advisors. And there are several nonprofits out there that will help you put together a board. So this is a board that advises you that they don't have direct authority, like a public board would have, and then have your family members or other, whoever you're thinking about with you. And through the board meeting. So have are the board meeting on your own in part with them, and let your board an outside person see what's happening. Because one of the things that I think is true of almost all parents is we can be a little biased. And sometimes parents can be a little too hard on their kids, or sometimes they're just seeing them with, you know, rose colored glasses. Both things can be true. But it's good to get an outside I put together a board for myself, I had three outside advisors. And they can that was the thing was number one thing I said is that I want to know if my daughter's capable taking over my business. I'm Sunday's, I think no. And other days, I think, of course. And they really work. In fact, they before I really got to the question, they they said to me, come on this 40 waiting for. So she does. She's the partner, I'm still active in the business myself. So I have linked all of it. So I think that's a great way. And I think another way is just to use some outside help around understanding what kind of you know, there's a variety of tools DISC profile, Myers Briggs, the Intagram ways to really understand how a person's mind tends to operate. And then look at how they how they function in your business. Are they people who bring people together? Are they people who have those new ideas, and they really make sense and you move forward on them already. So trust your chest, your I always say trust your experience more than what you think they are telling you. It's a possibility but what experience do you have with them? And does it seem like the kind of experience that would be appropriate for someone who's going to move the business forward?
Gary Pageau 4:46
A lot of times in family business structures, there is actually a board of directors because of the way the corporation is set up and you may have active family members and volley may have inactive family members involved. What is that? Some of the pitfalls with that sort of arrangement, because sometimes I've seen cases where some of the inactive family members suddenly decide, oh, I want to be involved now, and I haven't put any of the time or effort into it,
Mackey McNeill 5:11
I think have a you don't, that's not something I ever recommend. But it is something that happens, where you've got owners in the business, we're not working in the business. But my experience of that is, is it's usually better for the ownership to be really focused on just individuals in the family or working in the business. But if you've already got that situation, and you're not still a choice point, there are good practices, for best practices for how to put that word to use in the first place authority is to clarify, you know, what's the function of the board, what's the function of a shareholder, and what's the function of someone who's working in the business, because one of the things that happens with all business owners, when they become owners is they sort of collapsed, the idea that, you know, he's, they're both they work in the business, and they own the business. So it sort of all gets muddled together. But you know, if we stuck in a public company, we are expected, we're going to go in and tell everybody what their ways is going to be or what their new strategy's gonna be, or what their prices. But sometimes, if you're a family member, and your job isn't, for example, in sales, you think you might have the wisdom or the right to tell the sales department what to do. So clarifying those two roles is the very first important step.
Gary Pageau 6:25
I think one of the things you've touched on, is for the owner to actually know his business well enough to know what roles need to be filled?
Mackey McNeill 6:36
Absolutely, absolutely. I'm in a good structure, a having, you know, position descriptions, having a pay policy, all the things that culturally helped build a business that's not totally focused on the owner, I call it in some cases, a lot of business owners where they really have to start as they're being the fulcrum, you know, everything goes through them. And the first step might not be to define the successor, their first step might, might be to stop being a fulcrum, and build a wheel. In other words, start giving other people in your organization, some of the tasks that you hold dear, near and dear, I think you're the only one who can do that also give you some feedback as to who's the right successor,
Gary Pageau 7:19
Because in some cases, there might be multiple family members and multiple options. And sometimes that can lead to not only hurt feelings, but confusion.
Mackey McNeill 7:28
Absolutely, absolutely. And I think that's the tricky part. You know, we when we Nick's family and money, there's so many dynamics going on. And outs, I've seen people use outside coaches for this, they don't want to outside for advisors, or outside board of directors, someone who's non biased, and you can bring some really good communication skills to the to the table is really important and can for family, where you get mostly tied up is people have expectations that they don't want to speak into, because they don't want to hurt anybody else's feelings. Right? And that's just a recipe for things not going well.
Gary Pageau 8:09
Yeah, yeah. Because Bobby may be, you know, a nice guy and do well in the business, but he may not be the guy to run the business. And it's hard for dad and mom to tell him that.
Mackey McNeill 8:19
Exactly. So you know, all of that is why having someone that's a little removed from the family involved in that decision is often very helpful.
Gary Pageau 8:28
A lot of times in a family business, if if children are involved early in their career, a lot of parents will have their kids get outside experience, actually get a job outside the company, before they come back to work in the company just so you have different perspectives and different experience, do you recommend that?
Mackey McNeill 8:48
Absolutely, I think it's really important for a child that's working it is to have this experience outside. And the other is really helpful. You know, there are CEO groups, like run by a lot of nonprofits like the Center for Family Business, and Cincinnati has CEO groups. This ditch has CEO groups, he Oh, and so forth, but they're also people who put together groups of the next generation. So I find that that is a real eye opener often for the second generation for them to have other fears and second generation that they're working with. And to see that, because if you've only had the experience of your company, it's kind of easy to either be overly critical or optimistic about it. And having that other perspective of what are other people doing can be really helpful.
Gary Pageau 9:35
One of the things that you mentioned is in some of the briefing materials is open book management as a style. One if someone hasn't been using that process, because you know, it's a small business I kind of kept, you know, I don't want people to know what other people were making and you know, that that sort of thing. Can they make that chain?
Mackey McNeill 9:56
I find that they can but let me clarify open book man meant means that your financials are, are shared. But it's not necessarily mean that everybody knows what how much everybody else is making more than one employee and you have salaries on your financial statement, you know how that's divided up, it's not usually disclosed. So, but if you, I find that open book management is really a great way to involve your team to help you move forward. Great ideas often exist in your frontline, but it doesn't involve them and you don't get them, give them that kind of information, they don't have any idea of how to participate, right? I think they always say start with something, and then build on that. But you know, command and control as a philosophy of running a business is not going to continue, you see that? What's happening right now with a tsunami of turnover, they wanted for one in five employees still look for new work, well, they're looking to go outside of command and control. They're there and enjoy RMS more collaborative. So that's one of the great next steps to be more collaborative is to invite your team into the conversation about how to help you grow the business, the more successful you are, the more successful they can be. And vice versa.
Gary Pageau 11:14
Let's say someone is nearing retirement age, they've had their their the second generation their business, and then they realize they need to pass the business on or sell it or do something. How long should they anticipate that process to take? I mean, I'm thinking it's gonna take a few years?
Mackey McNeill 11:31
Well, in the best life plans, what I would say is you really need five years because you as you go through the process, the first before you start the transition, once you get to see how everybody's going to function in their potential new roles, we also get to look at how they move the business forward. Because a business is a business transition is a leveraged event. So when I say that I said that to a second generation person one time and they said, well, we don't like dead around here. And I said, Well, are you going to pay your dad, or whatever you call it, when you pay my salary for the rest of his life, or paying for a stock, you're paying him for not working in some way when our form. So the business needs to make more money. So that's the other reason to start putting in some open book management and some tools to help them really move the business forward, more progressively, in terms of focusing on your net income, not just your sales, building new growth plans, so that the business can can generate the cash flow, it needs to pay that acceleration, and for the second generation to get paid while they're working in the business, which is an objective that they have as well.
Gary Pageau 12:41
Yeah, there should be a financial incentive for this, that as the current owners look to pass on the business, they want to recoup some of their ROI, their sweat equity, and their financial investment in the business, and the next generation wants to earn a living. So there's got to be enough there for both parties.
Mackey McNeill 12:58
Right? You got it. The bottom line is when you're buying a business, whether it's from a family member or some someone else, if you don't have a vision for how to grow that business, you're paying for what it's worth today. So if you're going to pay what's worth today, and you got to have a vision to grow it or it's brilliant, probably not a good investment for you.
Gary Pageau 13:17
Now, have you come across cases where you've been coaching people and the incoming people realize, oh, my gosh, this is not what I want to do. And they kind of put a stop to the process. We
Mackey McNeill 13:29
start working with people in that five year period, I've had a few that it's decided that they're working on it that this isn't for me, which is a great hour, actually, that's a great thing to happen. Because then we know we're not gonna, we're not going to consummate this transaction in this way. Right? We need to look elsewhere. But I've never had a whole deal fall apart. Typically, there's enough interest that the owner, I mean, the next generation has come at some point raise their hand and said, No, this is probably for me, and I want to be considered here. And then if they start getting involved, they start having more ownership and how the business grows and how the business is functioning, and how the business makes money. They really kind of drink the Kool Aid at some point in the very end, you know, right. All entrepreneurs, you realize at some point, you're unemployable. Yeah,
Gary Pageau 14:21
exactly. Are there types of businesses that are better suited for a family environment?
Mackey McNeill 14:28
Well, interestingly, like 98% of businesses in the US are family businesses. People don't always think of them that way. But I always say, if you're a single owner, and you have a business, and that's the primary way that your family makes money, you have a family business, whether anybody else works for you or not, because that's you're naturally going to take that business home with you. I've seen failing businesses of all kinds, very large, enormous construction firms, as you mentioned, some with outside boards that have been going on for generations. It's very difficult. To get to those multiple generations, you've got to have a lot of ability to communicate, as I've talked about before, communicate openly about the finances and have all that open. And so people can see what's going on. And also be able to separate this idea of what what it's like to work for the business and to own the business and what my authority is as an owner, then you can probably begin to do that. But then you're getting into third and fourth and fifth generation that can be there are some very big companies.
Gary Pageau 15:28
So what are some characteristics of family dynamics of a successful transition, and I'm thinking in terms of you know, at some point, there has to be a handoff and a gradual, letting go of the business, any input into like, the new owners don't want Mom and Dad's input, but at some point, that's not going to be useful. And so that gets into family dynamics.
Mackey McNeill 15:53
Definitely. And, you know, I think that to step back from that, and this environment, there are there's a lot of money chasing businesses. And so sometimes there's an outside buyer that will pay a multiple than the inside buyer cannot pay. So the first step I like to do is to take to do a financial plan for the first for the owner for the current owner or owners, and say, what do we need to continue our lifestyle? Is the business? Is the business worth what that? You know, that number overs? If we made $5? million? Is the business worth five plus tax to? So I can sell it and and retire for the rest of my life? Or is the business not there yet. And if it or maybe I can, I need to get at least 5 million for myself, I could get 10 million somewhere else, if I sold it outside to some family members. But if I can sell it to my family, I can only I can manage. If I can save that, then I give you this bargain at five, you may or may not want to do that. But knowing what that number is for you, I think is a very important first step. And then the second step is having not you don't need to have a full valuation, but having some sort of market analysis to say, who are the buyers that would buy this company, usually there's a multiple, you know, family member buyers, other small business buyers, upstream buyers, that sort of thing, have someone lay all that out for you and say, These are the kinds of multiples we'll see in the marketplace for these kinds of buyers for your business. And then just basically, you've got a little puzzle, right? Here's what my business is probably worth of these different buyers. Here's what I need. How much of this is how important is it for me to transfer this to the next generation if they can't afford to pay me what I can get elsewhere? Am I willing to take that discount or not? So that's, to me the first two steps in any significant transition? Do you think
Gary Pageau 17:46
that owners tend to overvalue their business before they get into that process?
Mackey McNeill 17:52
Well, as I say, I've seen them do both. But I would often very unrealistic expectation for what businesses for either upside or the downside. Usually, it's all though issues is on the upside they will. But again, this particular I would say environment why so the next the last five years, and what I perceive to be the next several, the amount of money chasing deals is driving the valuation for small businesses up if you're looking upstream to there are a lot of people out there consolidating businesses, and they're together, and they're using venture money or you know, a SPAC or whatever they're, however, they're financing it, because there's so much concentration of wealth, people are banding together and buying more of trying to accommodate large sections of the marketplace. It's a very different environment than it was just five years ago, you see me or $2 million business maybe and venture capital would never be considered a concern about it. They might be lying to you
Gary Pageau 18:56
today. Yeah, we're seeing that actually, in the photo industry. We're having private equity companies and some venture capital coming in and buying and trying to consolidate some businesses. So that's definitely a trend that I can concur is happening even within our industry.
Mackey McNeill 19:09
Right? Right. And those changes that changes the dynamics, because those people have access to generally pretty cheap money that the family may not have access to. And they have a big they already have their big vision, right they already have for how they're going to leverage business to make it more profitable in the future.
Gary Pageau 19:27
What would you say is the success ratio of a family business decision succession within the family?
Mackey McNeill 19:36
Oh, you know what, I have those numbers but I did this podcast I apologize. This flow. I think only about 5% of business did to third generation. It's it's a very low number that get to that third generation. And not that many get I think about a third get to the second generation. So you know, and first of all, you think about it like you have to succeed and those numbers aren't exact a lot of people fail in business. But then if you've succeeded transferring to the next generation can be. And I think often when I see why does it fail, it fails, because when we haven't really looked at what are the qualities of the leader that we need to have, and we maybe chosen a little too much on our heartstrings. And also, we've just got really not making clear about the economics of this transaction. And does it make any sense in cannabis business take on this loan?
Gary Pageau 20:28
So tell me a little bit about your book the prosperity playbook planning for successful family business succession?
Mackey McNeill 20:34
Yeah, thanks for asking. Here it is. It is available on Amazon. And it in the book, there's a there's a good bit about transition. But there's also a lot about just how to make your business more valuable, how to grow your business to make it more valuable, how to begin to, you know, marry the challenges between family members, and how to understand what each generation needs so that you can pull all that together and how to really assess where you are. So there is a lot of financial tools and a lot of just basic tools that I put together I work with, in this environment for almost 40 years. I'm in my own business, so so that 1000s of business owners. And so I would say that for like 20 bucks, you can buy my 40 years of wisdom. If you get one good idea would be worth it. There you go.
Gary Pageau 21:28
That's awesome. Where can people go to get more information about Mackey and your company?
Mackey McNeill 21:37
Well, to our company website is Mackey advisors.com. And I encourage you to check out the event page for sure we do offer free workshops with using a variety of the tools that are in the playbook. But it's nice to have someone that facilitate those for you. And we do that for free, which is to build a small business community. And then in addition, the prosperity playbook calm has its own website. Okay, tell you more about the book, and my bio. And I also do some professional speaking I'd love to do that as well. So if you haven't heard that, I'd like to hear more on this topic.
Gary Pageau 22:13
Great. Well, thank you very much for your time and look forward to catching up with you in the future. Thanks, Gary.
Mackey McNeill 22:19
I appreciate it. Thanks for having me on.
Erin Manning 22:24
Thank you for listening to the Dead Pixels Society podcast. Read more great stories and sign up for the newsletter at www the Dead Pixels Society.com
Transcribed by https://otter.ai