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Value Creation Blog

The Dark Side Of Passive Ownership

Posted by Josh Patrick

Passive OwnershipI recently had to give a 74-year-old client of mine the recommendation that he closes down his business, either through a fire sale or liquidation.  I also had to make him inform his wife that in the process of this, their son was going to be fired.

Both of these are the two worse things I do when working on wealth management issues with my clients.  If I didn’t give him this advice he would run out of money in a few years.  And, in my opinion running out of money would be way worse for him than having a failed business.

At the same time none of this had to happen.  There are rules of being a passive owner, which need to be followed.  Unfortunately, he followed none of them.  Had he followed some of the rules below, I probably would not have to give the advice to close down his business:

A business is not a place to subsidize adult children and their lifestyle.  He knew that his son was not capable of running the company.  Allowing him to stay in place was not fair to either his son or the business.

You must have good metrics delivered on a weekly basis.  My client and his wife would take off for several months at a time.  He had no way of monitoring the business because his books were not in good shape.  Passive ownership is only possible when your dashboard is accurate, timely and meaningful. 

You must have good management in place.  He knew he had lousy management in place.  His son was not capable of running the business.  He brought in an old manager who was a great sales person, but wasn’t great at running the business.  You can’t become a passive owner without at least good if not great management.

When things go wrong, you must take effective action.  When you know things are going poorly you must take effective action.  First, you need to have good metrics to know what you need to fix.  Second, you must hold your people accountable for results.  If results are not quickly produced then those people must be replaced.

Most importantly, you must have good systems that are easily followed.  Before becoming a passive owner you must have not good systems, but great systems.  Your systems are what allow you to become a passive owner.  And, in many instances the systems are what let you become a passive owner in the first place.

I’m sorry I had to give my client the advice to let it go.  If you follow my rules above, your chances of being a successful passive owner will become significantly better.

Josh Patrick

I’ve put together a special report on relationships and roles in your business.  You can read out case study on how some business owner’s deal with burnout through managing their relationship with their business.  I think you’ll find the time invested worthwhile.  To order this complementary special report, click on the button below.


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Topics: financial planning, enterprise value, passive ownership

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