Family firms handed down from generation to generation have always dominated the PHC industry. I take a great deal of pride in watching my sons operate Blau Plumbing & Heating with minimal input from me these days, and I know a great many of you know that same feeling. It's a good thing, too, because business entrepreneurs aren't exactly clamoring to enter the PHC field with its tiny profits, huge risks and regulation burdens. If not for the traditional family businesses of our industry, where would the American public go to satisfy its needs for health, safety and comfort?
Lately, I'm beginning to wonder if this tradition isn't in danger of unraveling. Two conversations in recent months got me to thinking that way.
Both concerned plumbing firms operated by aging contractors who were counting on retiring by passing on the business to their kids. In both cases, the kids took a pass. Despite working as plumbers for the family firm, they decided they didn't want to buy the business from their parents. Or, more accurately, it was precisely because they worked in the business that they didn't want to buy it.
One of the contractors was pretty devastated by the news. He had been counting on his son buying the business, using funds from the purchase to help support his retirement. Somewhere along the way there appeared to be a lack of communication. When it came time to discuss the transition, the son, who had been working for his father in the business, said no. Instead of buying out his dad, he ended up going to work for a larger, more successful contractor in another state.
Can't say I blame him. He makes more money as an employee than he would presiding over the family business and the financial burden of buying out the founder.
Same story with the other contractor. He ran a fairly sizable service company, doing about $1 million a year in sales, but he was burdened with debt. The owner paid himself an income of $75,000, while two sons working in the business made about $40,000 apiece. But they wanted no part of taking it over.
They'd just as soon continue working as plumbers for $40 grand a year, either with their father's company or somewhere else. They know enough about the finances of the company to understand that by the time they paid off all they owed to various wholesalers, along with payments to their father, they'd be in worse shape economically than they are working as plumbers, and with many more headaches and responsibilities.
The contractor called me for advice on helping him shape up his business to make it economically attractive to his sons. It's late in the game to do that, but at least he is willing accept the fact that he has served as a poor role model throughout his years in business.
Retirement Plans: The two gents referred to in this article typify what passes for retirement planning in the PHC industry. The typical plumbing contractor has no retirement fund to draw upon. His retirement income consists only of social security payments, which barely are enough to pay the bills, plus whatever buyout arrangement he can negotiate with his kids or employees who remain in the business. Maybe he can squeeze out a few extra bucks selling his home and moving into smaller quarters.
A buyout plan often includes a continuing salary or "consulting fee." Often this means the owner is semiretired at best, still being counted on to contribute advice and his good name to help run the business. In addition to these regular payments for services rendered, he typically expects his kids or employees to make regular cash payments in return for a percentage of equity in the business, until they end up owning it in full.
Making these payments can be a tremendous burden. It sucks so much money out of the business that the new "owners" can't afford pay raises for themselves and other employees, or make any expansion plans until they pay off the original owner, which usually takes many years.
This is not to say that the owner doesn't deserve fair compensation for the business he built. Sure he does. The issue is where the money comes from to buy him out.
That Dirty WordThere's a lesson in here for all of you family business owners. It has to do with that dirty word: profits. Most family businesses in our industry earn very little in the way of profits. This is part of an intentional strategy of tax minimization. You don't want to pay any money to Uncle Sam, so you squeeze every penny you can out of the business as income and operating expense.
Yet, profits are necessary for any business to prosper. You need profits to support capital expansion, retirement plans and other benefits, and, ultimately, as a transition from one generation of ownership to the next. Without profits, business transition must be funded in one of the following ways, all of which entail onerous consequences:
1. Using operating income, which hampers the ability of the business to adequately reward employees and service customers in a professional manner.
2. Using personal savings, which few people in our industry have in abundance.
3. Using a bank or other lender, which must be paid back with interest.
When the business owes a significant amount of money to a bank, wholesaler or other creditor, as was the case with one of the contractors who inspired this article, it becomes that much harder for the new generation to pay off those debts and support the former owner. It comes as no surprise when, if they know anything at all about business arithmetic, the kids decide to take a pass on the "joy" of business ownership.
It all boils down to the same old story - you need to make enough money to pay the owner and employees the kind of income they deserve, with profits left over to provide for future growth of the company. In both cases referred to here, the fundamental problem with the business was the same as with 90 percent of the firms in this industry. The owners simply didn't understand their costs of doing business, and thus they didn't charge enough to cover costs and earn a decent profit.
Now they expect their kids to make the same mistake. Many do. But it appears that some are catching on that this business isn't worth being in at the existing economic structure. And this makes me very concerned about the future of our industry.