By Lauren Owen, Redpoint Succession and Leadership Coaching
I just finished reading Tom Deans’ book, Every Family’s Business. I’ve already given away my two copies of this book to clients and will likely give away more because of the excellent points Deans makes.
According to Deans, the most important thing that a founder can do is to think of the business as a money making asset, not as a legacy for the family. The true legacy is the wealth the family business creates, not the business itself. Part of this responsibility, he states, is in always asking the question: in whose hands would this asset create the most return? If the answer is “in someone else’s”, then that option must be explored.
Too many founders think in terms of what Deans calls a “perpetuity project” with the goal of keeping the business in family hands trumping the goal of the business as a money making asset.
When the goal is to keep ownership of the business in succeeding generations no matter what, the costs, Deans says, can be devastating. Next generations members can get stuck in declining businesses they either did not want and/or are unsuited to lead. Businesses can fail due to ownership that turned a blind eye to market realities or unqualified management. Ultimately, family relationships can be damaged or destroyed as a result. The wealth that the family was counting on to continue on to future generations (or, more importantly, pay for their own retirement) is gone forever.
One of the biggest mistakes, Deans says, is gifting ownership to children or key employees as a form of compensation. Bad idea! Ownership transfer should be treated separately, again after asking the question, “In whose hands would this asset create the most return?” Don’t mix stock ownership with employment compensation. Children (or key employees) should be fairly compensated for the work they do in salary, not stock. Another reason for gifting is to avoid taxes. A bad decision made for tax purposes…is still a bad decision.
Deans lays out a series of 12 questions that every owner needs to ask of themselves and then ask of their children and/or key employees at least once a year.
Here are Dean’s first four questions to get you started:
- What does your business look like in five years? (to both owners and child/key employee)
- Are you interested in selling your stock? If yes, to whom? (to owner and child/key employee if they own stock) _____Yes _______No If yes, To Whom __________
- Are you interested in buying stock and acquiring control? (to child/key employee)
- Do you understand and agree that in the interest of maximizing shareholder value, this business can be sold to a third party at any time? (to owner and child/key employee) ____Yes ______No
If you are like most of the business owners we see in our practice, your business is likely the single most important asset you own. And, if you are in the 80% of business owners out there who do not have a succession plan in place, for the sake of your family and your future, make it your business to explore the issues raised in Deans’ book. For more information on Deans and/or to order his book, visit his website.