Very often in agencies I see, parents and their child/children make a spoken, but not formal, agreement for the child/children to buy the family’s agency when the parents decide it is time to retire. No one talks about price initially, because both parties hopefully think it will be a fair price.
When the time comes to talk price, some parents become convinced the agency is worth far more than it is really worth, especially today. At first it is easy to chalk this up to the owners being caught in a time warp. If they are in their 60s, or, especially if they are in their 70s, they often refer to values last seen 10 or 20 years ago. Those prices are not feasible today.
But they are not always in a time warp. Instead, sometimes they are caught financially insecure. They are scared to death of running out of money; whether this is a real possibility is not important. Sometimes this manifests itself in the parents demanding compensation as if they were still working full-time in the agency, even after being partially or fully retired. Sometimes this manifests itself in the parents demanding an extremely high price for the agency. Sometimes the high price demand is just a feint because they really prefer being paid for not doing anything for as long as possible.
This is not to say they are bad people. This is to say they are scared people. How else do you explain parents demanding prices so high their children will go broke? How else do you explain parents’ willingness to end their relationships with their kids if their demand for a ridiculously high price is not met?
In those situations where money is a real issue, the parents often have not saved anywhere close to enough for retirement, and the only way they can retire, or at least retire and maintain their lifestyle, is to sell the agency for a ridiculously high price. Retiring without enough money is scary enough, but just stepping down a level in lifestyle can cripple many people. Sometimes it is not even about money. Sometimes they are scared to death of losing themselves because the agency is their identity.
If the situation escalates to a legal issue, hopefully both parties have big wallets because these legal battles are often far more expensive than similar non-family battles. It seems people would rather pay attorneys than deal with their deep emotional issues. If I could wave a magic wand, I would wave the wand and wish for both parties to seek competent emotional counseling.
Many people begin instead with financial counseling and an agency valuation. My observation is that having an expert confirm that an agency’s value is far less than the parent believes usually just adds fuel to the fire. The parents just stick their heads in the sand deeper. Denial is a common reaction to bad news. In these situations, three valuations are usually necessary before the older party will listen. Three valuations or a combination of valuations and failed sales may take years and are expensive.
If instead they begin with emotional counseling, both parties save money and heartache. The facts may not change, but the ability for both parties to deal with the facts will improve. Counseling often helps the family reconcile before it is too late.
Kids often make the situation worse by enabling their parents. It is difficult to not enable their behavior, especially if either parent is an expert at laying on guilt trips. The agency is not going to survive though, if reality does not pay a visit.
Tips for Families
Here are some thoughts about dealing with reality.
- Revenue Ruling 59-60 forbids a sale between parents and child for any value but the fair market value (as defined in the ruling). The bottom line is the fair market value is likely going to be far less in some situations than many parents desire. Furthermore, this ruling makes it clear the parties cannot, in reality, set the price themselves. An outside appraiser is effectively required. Paying an exorbitant price may be violating tax law, too. Outside guidance is essential.
- Rarely do the kids have noncompetes or trade secret agreements. If they are not already shareholders, they can take the business and start their own agency. This step comes with steep consequences because often the parties will not speak again.
- The parents can try to sell the agency to someone who will pay far above market prices. If the parents succeed in this, hopefully the buyer has a special opportunity because if the buyer is willing to pay that much without bringing something special to the table, they likely are not intelligent enough to build an agency with a strong future.
- If the children are already shareholders, hopefully the shareholder agreement is well-written. If so, that agreement will dictate much of what can and must be done. If it is not well-written, which is almost inevitably the case in these situations, praying is often a good strategy. I do not say this light-heartedly, because a bad legal agreement is usually worse than no agreement. Both sides have fodder to support their side and their attorneys’ ever growing fees.
These are extremely painful situations. I have seen people wreck their physical and emotional health trying their best to find some amicable solution that does not bankrupt them. This is impossible to do when the parents insist on their price regardless of the consequences to their kids or even their grandchildren. I do not wish this upon anyone. But these situations seem to be occurring more often as parents are retiring without adequate planning.
The good news that I have recently discovered for my clients is that with good emotional counseling, they can achieve the necessary closure even if the other party does not participate.
I am also glad to report that after having gone through this with the fathers, mothers, sons and daughters of many agencies, life does go on. It is hurtful, painful and life changing. But life does go on. Agencies recover. Other relationships are restored and established. The children hopefully recognize that their parent is still a good person, however scared or unreasonable. They hopefully over time recognize and accept they did the right thing for their immediate family, employees and customers. There is more at risk than just one person’s retirement. Seeking the greater good is often the solace a child needs to seek in these situations to make these most difficult, but correct, decisions.