The COVID-19 pandemic has been hard on businesses, and it’s no surprise that many owners may be looking for an exit. For some, that could mean selling. For others it may be time to let the next generation take the reins. Tom Deans, intergenerational wealth expert and author of Every Family’s Business: 12 Common Sense Questions to Protect Your Wealth, talks with Kim Parlee about why every business owner should put succession planning at the top of their to-do list.
But which one is right for you? How do you get ready, and what do you need to be thinking about? These are big questions and ones that our next guest ponders. Tom Deans is an intergenerational wealth expert and author of Every Family's Business-- 12 Common Sense Questions to protect your wealth. Tom, it's great to have you with us, and I want to start with a very basic question. Why do you think it's so important for business owners to have that exit strategy?
- Well, Kim, great to join you. I think it's super timely that we have this conversation because the leading edge of the baby boomers are turning 75 this year, and they're business owners in record numbers. And they've done what entrepreneurial business owners have always done, which is when they make money, they pump it back into the business, and they've been doing it for 30 and 40 years. There is over a trillion dollars sitting in the retained earnings of small- and medium-sized businesses in this country with aging owners, and they're turning to the oldest page in the playbook on succession plans, which is to do nothing. Do nothing, right? Semi retire. Let your kids run the business. Draw a salary until the day you die. It ain't working.
- So we're going to get into a little bit of why it ain't working, in your words, but I do want to ask you just because you know this not just from people you've talked to but you've lived this.
- Yeah, very much so. I joined my father's plastic-manufacturing business that he founded in 1973. I ran that business for eight years as CEO and then had an unsolicited offer to sell, and we did. We actually sold on February 8, 2007, which if you cast your memory back was about 15 minutes before the Great Recession.
And so I worked for the new owners for six months. I like to say I served a six-month sentence for a crime I didn't commit. I mean, it was really hard, and it is hard, and I think it's why a lot of family businesses never sell because they've collected those anecdotal stories about just how difficult it is for the next generation to work with the new owners. So that's why a lot of family businesses just never go to market.
And the M&A world, business brokers, investment bankers, they're missing out on this massive market because people are still committed to this old idea, which is that you measure the success of a family business not in dollars and cents but in years, longevity, generations. It's destroying family relationships and family wealth at a record pace. It really is time for a new approach.
- I want to talk about the approaches, but I guess I want to hammer home the problem because you said earlier that what people often do is they just do nothing and they just kind of wait for things to sort themselves out or wait for their kids to-- so tell me kind of what problems happen when you do that.
- Well, the problems really stem from the fact that not all children join the family business. So often you have one in the business, one outside the business. And because most of the family wealth is in the business, the children outside the business think that the child in the business, their brother or sister, is going to jump on the money. So right out of the gate, when there's silence around the succession plan or the transition of that business, often you have these families that are buckling under the stress of the silence.
So really the big message is that it's families who are working with advisors with family meetings and proper facilitation and transparency and lots of conversation to really tease out that solution that's right for that family and then implement it.
- So let's talk a bit about how you have those conversations. I think one of the things from reading some of your work is you have to have a conversation with your kids to see even if they want it, and that's hard, right? I can't imagine like you-- you know, sweat equity. You've built this business. And to have your kids turn around and say, yeah, not so much. I don't want to be involved. I guess they have to value it if that's going to be the plan.
- No, you're 100% correct. The reality is that there's a lot of next gens working in these family businesses really out of a sense of duty and obligation, and no one's really having the conversation about whether or not they want to risk their capital to buy those shares.
And because there's so much silence, the kids are kind of hanging around. It's an economic incentive that we're dangling to the next generation not because it's a really conscious decision. It's because we don't know how to frame or kick-start these conversations.
So unlike building a fence in your yard in the summertime, great do-it-yourself project, business succession planning left to your own devices, not advised. There are so many moving parts. There's tax issues, legal considerations, huge emotional problems, especially for founders to detach. It is so complex. You know why business owners kick the can down the road and really metaphorically-- not so metaphorically-- die at their desk, leaving all sorts of capital gains that are triggered, underinsured, no liquidity, lots of problems.
- Yeah, we've talked about that in previous episodes of just children who end up inheriting a lot of problems, quite frankly, because the estate planning wasn't done ahead of time.
OK, so we can talk about the tax, the estate, and the business planning, but I want to talk about the conversations first off. Where do you start? Where do you start with your kids just having that conversation to open up the lines of communication and get it going?
- So families are struggling with this, and I think one of the great techniques that works is to have a family meeting, to have the controlling shareholder and their spouse-- Mom and Dad if you will-- offer to make a living gift to their children. And the amount is irrelevant. It can be $1,000, $10,000, $100,000, a million, $10 million. The amount is really irrelevant.
But watch this. Here's Mom and Dad in a family meeting with their advisor present, and they make a living gift to their children, and they say this. You can take this gift and you can do anything you want with it. Or our business is for sale. Would you like to return that money we just gave you in exchange for some voting shares?
Follow the money, Kim. It never lies. Children who are enticed into family businesses or enjoy their job but don't want to be owners-- risk their capital, risk their inheritance, if you will, to own that business, they're not going to return the money. That little technique will be the first clue of whether or not a family-business owner has a buyer in the house.
And guess what? Newsflash-- most don't.
- [LAUGHS] My last question for you, Tom. And again, we're just scratching the surface, but it's one thing to have, I'll say, the emotional conversation, but I heard you say also make sure you're doing it with people in the room with advisors or planners or people who are in the business of doing this because it's complicated.
- It is complicated. And one of the great benefits of a family meeting is everyone hears the same thing at the same time. And so the children outside the family business would actually see the child in the business risking their capital to buy that business at full market value, no haircuts, no discounts for family, at least not in ours. We always had to pay market value based on a third-party valuation.
That is crucial because the children inside the business see that there's no shortcuts taking place, that their sibling is actually getting the business the old-fashioned way, by risking something. That's what makes founders-- they're amazing people. There's nothing more insane than leaving a safe job, using your savings and family money and bank debt to build something that doesn't exist with no promise that it's going to succeed. It's insane, and yet that's what founders do.
And over time, they succeed, and then what do they do? They ask their children to skip that whole front part of what they did, which is that risky part, that gnawing knot feeling in your stomach where you can't sleep at night because you don't know if you're going to make payroll. That is what makes business owners truly remarkable, and that's what we have to put our kids through.
It's tough love. It's a difficult message to deliver. When I'm delivering keynotes at conventions, that is a really tough message to deliver. But I can tell you right now, they're grateful. They're grateful to really answer that question that people are struggling to answer. Do my children want this business enough to risk something?
- Tom, great to talk to you. Thanks so much for joining us.
- Kim, thanks for having me. That was fun.