The Disruptor Podcast

Beyond the Founder: Beating the Odds in Family Business Succession

• John Kundtz

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In this episode of The Disruptor Podcast, host John Kundtz discusses the challenges and opportunities facing family-owned businesses with guest Lowell Mora, CEO of Impact CFO.

Together, we explore why 50% of family businesses fail after the owner's death and how Lowell's "disruptive" approach can provide invaluable insights on avoiding common pitfalls and ensuring lasting success across generations.

Key Topics Discussed:

  • The alarming statistics behind family business failures
  • Common mistakes in succession planning
  • The importance of early planning and overcoming ego
  • Key financial practices often overlooked by family businesses
  • The value of fractional CFO services for small to mid-sized companies

Highlights:

  • Only 1 in 3 family businesses survive to the second generation, and just 1 in 8 make it to the third
  • 40% of family business owners consider themselves financially illiterate, yet 81% handle their own finances
  • The benefits of implementing basic financial reporting and budgeting practices
  • How to approach succession planning 5-10 years before intended exit

Lowell's Key Advice:

"Check your ego at the door and realize that you're not going to be able to run the business forever. Put a plan in place and say, 'Hey, I'm not gonna be around forever.'"

Deep Dive Opportunities:

Want to unlock the secrets to preserving your family's legacy? 

Contact Lowell for a free consultation and access to his 13-week cash flow forecasting template. 

Comments or Questions? Send us a text

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Speaker 1:

Unlocking the Secrets of Multigenerational Business Success. Hi everyone, I'm your host, john Kuntz, and welcome to another edition of the Disruptor Podcast. For those that are new to our show, the Disruptor Series is your blueprint for groundbreaking innovation. We started in December of 2022 as a periodic segment of the Apex podcast. Our vision was to go beyond conventional wisdom by confronting the status quo and exposing the raw power of disruptive thinking. Today, we talked to Lolo Moro, ceo of Impact CFO, to explore why there is a 50% yes, 50% bankruptcy rate of family-owned businesses after the owner's deaths. We will discuss valuable advice on the pitfalls and mistakes founders and business owners make and how to avoid them. Welcome to the show, loyal hey, john, thanks for having me. It's great to have you A bit of a different approach to my normal guests, but I think your topic is very relevant.

Speaker 1:

I see this problem of doing succession planning on family owned businesses. I see it a lot here in Northeast Ohio because we have a lot of small multi-generational businesses and, unfortunately, a lot of them fade away after the original owner passes away. Before we get going, if you don't mind, take a minute or two and tell us about your background, your education, your experiences, how did you get here and you can start anywhere you want. Yeah, I like to tell the story of somebody in my family told me when I was about 12 years old that I should be an accountant. I was a pretty obedient little guy and so I kind of said, hey, yeah, that's pretty cool, I could deal with numbers. I grew up lower middle class. If you were going to go to college, you better come out with a vocation. So I kind of did that. I went to Washington University in St Louis business degree, undergraduate accounting, cranked it out there and then got out of college. I undergraduate accounting, cranked it out there and then got out of college. I'm from Chicago I still live in Chicago moved back to Chicago, as we all good boys do, and went to work for in public accounting, which is what all good accountants do.

Speaker 1:

I worked at Arthur Anderson for three years. I did not put them out of business. I left there in the early nineties and had nothing to do with that. But I quickly found out. I got a great foundation, learning the keys to accounting and reviewing things and all of that. But it wasn't that much fun and attractive to me. So when I left there I went to work for primarily. For a few years I worked for some larger publicly traded companies, grinding my teeth in the accounting departments, reviewing, cranking through and moving along. What I found was that big companies weren't for me because of the bureaucracy, the lack of the ability to be creative and really get in and touch the business.

Speaker 1:

Got my MBA at Kellogg Northwestern University in Evanston here and then I took a career switch in 95, mid-90s and started working for family-owned businesses. Most of the businesses have been standalone or subsidiaries. 50 to 250 million in sales, manufacturing industrial products, industrial equipment, after sales. I like the inventory, the mess of manufacturing, so what you can create with it. So worked for five or six different companies and I had the fortune the last five years full-time CFO. I've been a CFO for 25 years.

Speaker 1:

Over the last five years two third-generation family-owned businesses in the Chicago area. I was able to help them as a full-time CFO to successful exits. First one we sold to a large publicly traded company wasn't my cup of tea. The second one we sold to private equity guys, independent sponsors and a consortium of a family office. Stayed for a bit, tried to figure out what to do and decided that wasn't the environment I wanted for the next 5, 10, 15 years. Not the same shared values and ethos that I had. I ended up starting my own firm. Starting my own firm, I'm focusing on helping that small, mid-to-mid-sized family-owned business and getting them going on that transition and exit planning so they don't end up in that 50% category. That's a great pedigree.

Speaker 1:

Great schools WashU is one of those hidden gems that nobody knows how it really is and how smart you have to be to get into it. Kudos, I don't think I could get in there today. We're probably all on the same boat. I'm not sure I'd get into schools. I was recruited by Arthur Anderson on their consulting side, or IBM, and I ended up going with IBM but both had great training programs. Arthur Anderson had that campus in Chicago where they used to send everybody yeah. So we had a campus Dallas, texas. I got to spend my first year three weeks at a time in Dallas. You mentioned 50% bankruptcy. I've seen families torn apart, estranged. Here in Northern Ohio we have a lot of this, the sort of same small manufacturing companies. A lot of them are tier three or four automobile suppliers or they've been making widgets for years. Again, very much perked my interest. There's a lot of pertinence. Here in the Rust Belt and in the Midwestern areas, we transform a lot of these businesses.

Speaker 1:

What are some common mistakes or pitfalls that small businesses or mid-sized businesses make when they're trying to take this more traditional approach of succession planning? The diagnosis or symptoms come before they try to do it, because most businesses don't want to engage in the discussion there's typically. Most of the business I work with are five to 50 million in sales run by men who don't want to deal with not being in charge or their mortality. So they ignore it or they just assume that one of their children is going to come in. But even when you do that, you have to plan it. So the big diagnosis is there needs to be some planning. If you have a family member that's going to come in, that you have to plan that and transition it. If you don't have family members that are going to come in, then you need to certainly plan to put the business in a position at the right time that you can look at an external exit.

Speaker 1:

I've never met a business owner who thought their business wasn't worth more than it really was in the marketplace. They love that business and they think it's great, but there's a lot of factors. You have to gauge what the business is worth and take steps based on what the family owner wants. But what I'm finding is that to have those discussions sometimes are very, very difficult. So if you can find another trusted advisor that can help to get that decision-making process in place, it really helps. It sounds very analogous trying just to get your financial plans in line your wills, trust, power of attorney, stuff. Nobody wants to talk about what's going to happen when you're gone.

Speaker 1:

I had a good friend of mine had a nice little business. It was a sales consulting business, sales training business, and he built it up to a pretty decent business. He could have sold his franchise rights and the business when he decided to retire, but he ignored it. Slowly but surely the business started dwindling down and he could live off of it, but he wasn't building value. When he decided to pull the plug, he basically shut the doors and went away and he could have probably gotten a pretty decent price for somebody to come in and buy up his franchise, especially if it had a good book of business. Yeah, two really interesting things you said. Compare it to your estate plan when you you know you don't have to have an immense amount of money to put a trust together. Right, I'm not an expert on this stuff, but what happens? A lot, especially when it goes, when something would go to probate, because if you don't have a trust goes to probate takes six months or longer and a home involved and the deceased may be able to pay for it, but the family members may not keep the maintenance and they end up in foreclosure and lose the value of that home.

Speaker 1:

In businesses, as people age and see it as a hobby or income stream, they take their foot off the pedal. Business development and growth and things go away. So that value of that business gets deteriorated. When, if you just put a plan in place and kept it going along or hired somebody else to help you run it, you can reap the value from it. When you close the doors, it's really scary to me. What about all the other stakeholders involved, not only the family, but the other employees, their families, vendors, everybody else is disrupted. It's kind of a scary thing. I didn't even think about that. There's a domino effect outside of the immediate family employees, their families, suppliers, customers the whole ecosystem can get turned upside down.

Speaker 1:

What specifics or guidance would you give the founder or an owner of a family business? I would say the first thing, and it's really hard to do because as we all get a little bit older, it's hard for us. But first check your ego at the door and then realize that you're not going to be able to run the business forever. The ideal businesses for me are when we can get them with five to seven to 10 years of runway, so you have options to go into it. So the guys my age, mid-50s that's the perfect time. Put a plan in place and say, hey, I'm not going to be around forever. If I can stay and run this for 20 years and I have a contingency plan, that's great. But if anybody could predict the future, we'd be doing other things to make a lot of money.

Speaker 1:

Don't ignore the reality of what's going to come. A lot of business owners I talked to I asked what happens if you get hit by a bus. Well, well, we're screwed, I go. Well, you're 72 years old. Do you think that there's any possibility that anything's going to happen to you? It's not only passing away, it's disability, as in my wife will be okay, you have life insurance, but then your family or your wife is going to have to deal with running this business. That's an albatross. So I say simple things like do you have key man insurance? And then I get quizzical looks, changing your mentality on it and not wanting to have to run the chauffeur. It's hard, right, it's hard, we've been worked hard and we want to be in charge and we want to do all this stuff Start talking about, because if you hear about presidents and all that, they're always talking about their legacy. But if this business you started 40 years ago can stay around for another 40 years, run into second, third generations, that's awesome. Now I have some other really interesting stats. So one in three, only one in three businesses make it to the second generation and only one in eight make it to the third generation. Now, if you do some planning and some foresight, you can really bring those odds down a lot, and that's what I'd like to do.

Speaker 1:

Rather than these businesses shutting their doors or being sold to financial owners and sponsors, I'd love to see these family-owned businesses exist. Sponsors, I'd love to see these family-owned businesses exist. What do you believe, though? Just highlight the benefits of taking the approach you propose as part of your fractional CFO services. What I do is fairly all of this is fairly simple.

Speaker 1:

Most family-owned businesses, if they don't have any bank debt, they don't have any need to have audited or published statements, right? All they really need is their tax return, right? So they're booking transactions all year. They're not really looking at anything. They know at the end of the year we made a little money, they could pay their taxes, they can take some withdrawals. They don't really know the key drivers in their business.

Speaker 1:

So the first thing I say is, hey, do we have financial statements on a monthly basis? Sure, well, do you look at them? No, we never look at them. Well, let's start looking at them and make sure they're accurate. Usually, these businesses have somebody recording the transactions. If they don't, we can figure that out and staff the accounting department. Do you know what's driving your margins? Do you know any of these things? They're operating as if well, if I have money in the bank, I can do stuff. If I don't, I can't. Not the way to run a business. Now, these are smart people. These are smart people who are experts or engineers, but they're not smart at finance because that's not what they've been trained in and they haven't had to do that. So really it's.

Speaker 1:

Let's get a handle on where you stand today and I can, in a pretty quick fashion, assess what is the key measure in any businesses what's your EBITDA, what's your adjusted EBITDA? We can do that quickly. We're not going to sell it. You don't have to get all the outside valuations and say, hey, you've got, you got a business and it's got a half a million dollar EBITDA you, in a period of time, can expect again. There's a lot of factors that go into it. Get a multiple of between three and seven, let's say five. This business is worth two and a half million dollars. Do you want to sell it now? What do you want to do? Do you want to grow it to make your generational wealth more? Do you have 10 years left? What do you want to do?

Speaker 1:

You have to understand the history before you can do forecasting, budgeting, strategic planning, growth. Should we borrow money? Should we not? I bet 90% of family-owned businesses don't borrow anything. If you go into them, they all have capacity. They're probably pulling cash out every year. They have a contingency line of credit they never use. So the interesting part is to me is that when and I've worked for businesses where they're big businesses. We've been pulling money. Family's taken out dollars a year it's a $20 million with their business. I can't believe that you don't have some projects or new things in your company that would have a higher net positive present value than three or 5% that you're getting in the market. And that's even before you're trying to take out some debt to grow. But a lot of that is these vestiges in the end of the our parents, grandparents, who came from the depression, and that was a really tough time. We're still fighting on that. That's what I do.

Speaker 1:

Then we start planning. Go to the clients. Do you have a budget? No, why would I have a budget? Well, there's a lot of reasons to have a budget. Again, a lot of businesses, especially bigger ones, have a budget because that's how people are compensated. Regardless, you want to have a guideline and a guidepost and in putting together a budget, you make some planning for the year and then you have something to strive for.

Speaker 1:

If you're doing $20 million and you want to grow, hey, let's put a target out there and say we want to hit 25 million in sales this year. Well, what do we have to do to get there? Well, we have to hire these people. We have to put these programs in place. We have to do this and we do. Do we not want to do it? Let's at least have the discussion.

Speaker 1:

You can see I get excited about this stuff, I guess, for totally I can see it. But I also think that what you just mentioned, especially some basic financial and accounting reports and mechanisms, that's just. It's a good foundation because if you want to or if you need to do something, that stuff already. So if a, if an investor comes in or wants to buy your company unexpectedly, you don't have to spend six months trying to recreate three years of accounting reports. You have it, you can show it to them. I've seen that the due diligence these companies go through as part of an acquisition on the buy side when I was at IBM, and what we made that company do was grueling and it was brutal. So, anyway, very good. I want to wrap things up, but I think you've given us some great insights on pitfalls and mistakes and what people should do and some of the benefits. But I always ask one last question Is there anything I haven't asked you that you'd like to share?

Speaker 1:

One of my favorite statistics is and it's a three-pronged statistic. This was a study not done by me, done by Intuit a couple of years ago, and these are not my words either. These are not my words either. 40% of family-owned businesses, business owners, consider themselves to be financially illiterate. Now, that's not my words, those are their words. And, in turn, 81% of family-owned business owners take care of their own finances. What does that mean? Roughly 32% of owners, 9 million companies in the US. The finances are being handled by people who don't know what they're doing. Now that's causing this endemic of family owned businesses going bankrupt.

Speaker 1:

Cfos are expensive, right, guys like me aren't cheap. But in the end, if you go out and you hire somebody who's can do that, and hire them on a fractional basis, the value is immense because you get that executive strategic sounding board in your business to help you. That makes sense. You get what you pay for, there's no question. And what's cool about fractional services is it's like the pay as you go economy we've created. If I need you for five hours a week, I get five. If I need you for 20, I get you for 20. If I got a big project and need you full time, you come in for a couple of weeks. This notion of fractional services is very valuable.

Speaker 1:

Can I share one more thing? So the way that I run my business is I typically like to have a monthly retainer that's loosely based on hours, but it's based on value you're going to get and what the output is. But a lot of my, a lot of other people doing it make you sign a six month contract. I don't have any contracts. I mean, we put a contract together, but all of my stuff is month to month. All you have to give me is 30 days notice and we're done, because I'm so confident that the value you're going to get out of our services is there. And if you come to me and say, hey, we need to do less or we need to do more, that's what we do. So you're exactly right. That's a good segue into the conclusion here.

Speaker 1:

So again, I want to thank you for sharing your insights and experiences and, if you wouldn't mind, just let's wrap up on how can people learn more about you and your fractional CFO services? What are your socials? Where do you hang out? The best way to reach me is my website, impactcfonet. Check out my website. It's a pretty good website and in my website there's several free offers. I have a free hour consultation, a free template, a 13-week cashflow we didn't even get into that 13-week cashflow forecasting spreadsheet and if you do that, then we can have a half-hour consultation, free working session on that. So the website's the best. You can email me directly at Lowell, which is L-O-W-E-L-L, at impactcfonet, and you can also just call us directly 1-847-212-4081. I have a presence on LinkedIn. If you go to LinkedIn, there's only one of me. That's awesome. By the way, we always put all those links into the show notes so you don't have to take frantically. Take notes. Connect a little on LinkedIn.

Speaker 1:

Before we wrap up, I'll give you the last word. Yeah, I'm talking directly to family owned business owners. Put a plan in place, fail to plan and plan to fail. Family-owned business owners put a plan in place, fail to plan and plan to fail. It's not good to leave your family in unfortunate situations and I can help you. Thank you for listening. That's awesome. We used to use plan to fail or fail to plan a lot at IBM. So anyway, lowell, have a great day. Thank you so much for this interview and again, I'm John Kuntz and thanks for joining us for this edition of the Disruptor Podcast. I'm John Kuntz, and thanks for joining us for this edition of the Disruptor Podcast. Have a great day.

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John Kundtz

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Lowell Mora

Guest