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Second Generation Complacence

Oh I just love this house,” Emily (her real name) said as she was checking out. “It’s a shame it’s fallen into such disrepair. We have so many memories over the years, but we can’t stay here next time we’re at the beach.”

Emily loves going to Seaside, a wonderful community on 30A in the Florida panhandle. Her family has been going there since her children were young. For the past few years, she and her husband Jim (his real name) have rented the same charming, one-bedroom cottage named Blue Water (not its real name).

Blue Water was built in the early 90s, and as anyone who knows beach living knows, beach cottages don’t age well. An owner of a beachside property must be vigilant and consistent to ensure the property stays in Grade A condition.

On her spring trip to Blue Water, Emily noticed the house was slipping into disrepair, so she thought the owner might consider selling it. When she checked in for her recent summer visit, Emily asked the rental company manager if the house would ever be for sale. “I doubt he’ll want to sell it,” the rental manager told Emily, “the owner just inherited it from his father and likes the regular rental income.”

Unless Blue Water’s owner invests capital to improve his cottage, he’ll start to lose rental income from renters like Jim and Emily. Of course, the cottage is not likely to go to zero revenue anytime soon. There will always be demand for beach properties, even those in lousy condition. But the cottage will generate substantially less revenue in its present condition than it could if it was upgraded.

Which begs the question, why won’t the owner invest money to improve the cottage and generate higher rental income? Most likely it’s one of two things, either he simply doesn’t have the capital to invest, or he is complacent (or risk-averse) and happy with the lower income.

As Emily and Jim (me) were lamenting the need for a different cottage on our next trip, I told her this is not an uncommon situation. As is the case with Blue Water, this usually happens when the business is handed down from one generation to the next. Either the second generation doesn’t have the passion to maintain the business, or they’ve gotten comfortable with the cash flow of the business. Of course, you’d think the natural reaction would be to upgrade the business to keep the cash flow growing, but trust me when I tell you, that is not always the case. Though there are exceptions, it is common for second-generation business owners to simply have less energy or passion for the business handed down from the parents.

So what’s a parent to do to help the second generation stay focused on business viability and growth? What I’ve seen work is for the parent to establish a transition advisory board three to four years before the transition, extending two to three years after the transition. If the business is doing well, the insight of a transition advisory board is all upside. But if the second-generation owner is inclined to rest on their laurels, the transition advisory board might be just what is needed to ensure the asset is not squandered.

Blue Water’s owner, wherever you are, I’m looking at you.

 

JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. Jim is the author of Home Run, A Pro’s Guide to Selling a Business. https://www.amazon.com/Home-Pros-Guide-Selling-Business/dp/1599329239 .  He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee. The principles above are true, but the names and fact patterns are changed to preserve the parties’ identities.

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Tennessee Valley Group

Jim is an attorney (non-resident status with the Missouri Bar) and though he no longer practices law, he has read and negotiated enough legal documents to fill a cargo tanker. He has an MBA from Harvard Business School and knows how Wall Street and private equity operates. Jim is a Tennessee Supreme Court Rule 31 listed general civil mediator with tons of experience helping business owners (large and small) work through sensitive problems to achieve winning results. He is the author of "Home Run, A Pro's Guide to Selling Your Business, Seven Principles to Make Your Company Irresistible."